Open-End Fund Definition
A mutual fund that can issue unlimited number of shares is called an Open-End Fund. Mutual Funds provide a convenient investment opportunity for investors as a majority of them are Open-End Funds. When the number of shares is too large to manage, the mutual funds issuing firm/management can decide to cap the limit. In extreme cases, existing investors can vote to close the fund to new investors.
A Little More on What is an Open-End Fund
Issuing unlimited number of bonds or stocks is the hallmark of an Open-End mutual fund. Buying these stocks increases their number while selling them deducts the value from circulation. Net Asset Value (NAV) is the price at which these shares are traded. This value is determined by the total value of the mutual fund’s underlying securities, summed up at the end of the trading day. When a large block of shares are cashed in by investors, capital is raised by selling some of the funds’ investments to pay off the investors.
Investors looking to diversify their portfolio at a low risk in an easy way invest in such Open-End Mutual Funds with the aim of rapid growth or long term income. Open-End Funds are easily accessible owing to their low cost entry and negligible risks.
Similarities and Differences Between Open-End and Closed-End Funds
Both types of funds are operated by portfolio managers with the help of analysts. Both hold diverse investment portfolios that help in mitigating risks. Since the investment is pooled, both are easily accessible with low investment entries while maintaining low operational costs.
Closed-End Funds have a fixed number of shares that are issued via an IPO and traded in the public sphere, as opposed to the unlimited number of shares that can be issued in an Open-End Fund which aren’t traded on a public exchange.
Pricing structure of an Open-End fund is decided based on the NAV at the end of a trading day. Closed-End Funds’ prices fluctuate throughout the trading day based on the NAV value.
Closed-End Funds are more liquid compared to Open-End Funds which can’t be offloaded on the market.
Closed-End Funds can invest in illiquid stocks like real estate, and create a more diverse portfolio as they aren’t required to maintain cash reserves like Open-End Funds.
Open-End Funds are low risk and low return. Closed-End Funds are slightly higher risk and provide much higher returns.
Advantages of Open-End Funds
Open-End funds are easy to buy in, low risk, require low investments, allow investors to have direct market participation without the needs of an intermediate broker. Selling prices mostly reflect the intrinsic value of the underlying assets. Open-End Funds are more widespread than Closed-End Funds, and used in most 401(k) plans in company sponsored retirement schemes to diversify the holdings portfolio.
References for Open-end Fund
Academic Research on Open-end Fund
The Japanese open–end fund puzzle, Brown, S. J., Goetzmann, W. N., Hiraki, T., Otsuki, T., & Shiraishi, N. (1998. (No. w6347). National Bureau of Economic Research. This paper puzzles out the underperforming Open-End Funds market in Japan and analyses the various factors at play.
Fund Performance and Investors’ Choice——Analysis on the Redemption Puzzle of Open–end Fund Market in China [J], Baizhu, L. R. C., Longbing, X., & Xinhou, X. (2007). Economic Research Journal, 6, 003. This paper analyses the Open-End Funds market performance in China and puzzles out its concave, negative Performance Flow Relationship (PFR).
Historical Performance and Fund Flows: Does” Redemption Anomaly” Exist in China’s Open–end Fund Market?[J], Jun, X., & Jing, S. (2011). Economic Research Journal, 1, 112-125. This paper takes a look at the historical performance of China’s Open-End Funds market, puzzles out its ‘Redemption Anomaly’, discusses reasons and suggests corrections.
Optimal control of liquidity risk of the open–end fund, Liu, H. L., Zhong, L. M., & Wu, C. F. (2003). Control and Decision, 18(2), 217-220. This paper takes a look at the risks of limited liquidity in Open-End Funds.
The Endogeneity of Open–end Fund Redemption and Performance [J], Jinyu, F. (2009). Securities Market Herald, 3, 007. This paper studies the impact of reverse direct on Open-End Fund Redemption performance with the help of dynamic panel data.
The German open–end fund crisis–A valuation problem?, Weistroffer, C., & Sebastian, S. (2015). The Journal of Real Estate Finance and Economics, 50(4), 517-548. This paper studies data from the German Open-End Funds crisis of 2005-2006 and investigates the causes, suggesting that a flawed valuation process was the prime factor.
Analysis of Chinese Open–end Fund Investment Styles [J], Tieniu, D., Naiding, Y., & Yugong, S. (2008). Management Review, 7, 002. This paper looks at empirical data from 2001 to 2003 and estimates quantile regressions to study the Open-End Funds performance metrics in China. It also sheds light on the investment styles and returns based analysis of the market.
Chinese open–end fund operational efficiency appraisal using data envelopment analysis, Song, G., & Guo, W. (2008, November). In Risk Management & Engineering Management, 2008. ICRMEM ’08. International Conference on (pp. 570-575). IEEE. Data Envelopment Analysis (DEA) model is employed by this study using empirical data to evaluate 50 Open-End Funds’ efficiency in the Chinese market.
Managerial ability, open–end fund flows, and closed-end fund discounts, Wei, B. (2007). This study sheds light on the relationship between managerial ability and the fund flows in Open-End Mutual Funds and discounts in Closed-End Mutual Funds by creating a dynamic equilibrium model with rational expectations.
Whether the Closure of Star Fund Enhance the Spillover Effect?——The Empirical Research on Open–end Fund Family, RAO, Y. L., ZHANG, Y., & HU, X. L. (2010). Forecasting, 3, 007. This study looks at the performance of Open-End Fund families and their behaviour.
An empirical analysis of the volatility in the open–end fund market: Evidence from China, Xie, S., & Huang, X. (2013). Emerging Markets Finance and Trade, 49(sup4), 150-162. This is a study of the Chinese Open-End Funds market and the four major factors that affect its performance with focus on empirical data and volatility.