What are “Open-Ended Mutual Funds?

Open-ended mutual funds are actively managed pooled investment vehicles (managed by investment firms) that pool money from multiple investors and invest the same in a plethora of financial instruments such as equities and debt among other securities (i.e., invests in a diversified portfolio of financial assets). In such funds, shares can be issued or redeemed (repurchased) at any time or on-demand. There is no fixed maturity period.

Simply put, when an investor wants to invest in a mutual fund, it issues new shares in exchange for their investment money. On the other hand, when existing investors want to withdraw their investment money, the fund redeems or repurchases their shares and pays them to cash in return. In the case of open-ended mutual funds, their shares are available to investors for subscription and redemption (repurchase) on a continuous basis i.e., on-demand.

Key Learning Points

  • The Net Asset Value (NAV) of an open-ended mutual fund is the total value of its assets minus the total value of its liabilities.
  • The NAV per share is the price per share that a new investor pays, in order to purchase the shares of an open-ended mutual fund.
  • Open-ended mutual funds have certain advantages such as access to liquidity, diversified portfolio, and availability of various systematic investment options among others. However, they are not always tax-friendly.

Open-Ended Mutual Funds and Net Asset Value

An investor invests his or her money in an open-ended mutual fund by purchasing its shares (directly from the fund) at the Net Asset Value (NAV) per share.

NAV = Total Market Value of a Fund’s Assets – Total Value of its Liabilities

The same is defined as the market value of that fund’s assets at the end of each trading day from which any liabilities associated with the fund are subtracted to arrive at the total net assets or net asset value (NAV) of the fund. The managers of these mutual funds calculate the Fund’s NAV, which changes daily as a result of market fluctuations in prices of stock and bonds included in the investment portfolio of the fund.

NAV per Share = Total Market Value of a Fund’s Assets – Total Value of its Liabilities/ Number of Outstanding Shares

The NAV per share is the price per share that a new investor pays to purchase shares of an open-ended mutual fund. As the NAV per share is the price at which new shares of open-ended mutual funds are purchased or redeemed, it is used to determine the value of an investor’s holdings in that mutual fund.

NAV and NAV per Share – An Example

Given below is an example of an open-ended mutual fund ABC with a NAV of $2,000, with the number of shares outstanding at 200. Further, we assume that a new investor wants to purchase 200 shares of this mutual fund.

Having stated the above, given below is the calculation of the fund’s original NAV per share, ‘the total price paid by a new investor when he or she purchases 200 shares, the new NAV, and the new NAV per share (that remains unchanged).

Open Ended Mutual Funds Example

Having stated the above, there are two important points. First, the new NAV is equal to the original NAV plus the total price paid by the new investor to purchase 200 shares of this open-ended mutual fund. Second, for existing shareholders of an open-ended mutual fund, the additional purchase of shares does not affect them. As we can see, the new NAV per share continues to be $10. In other words, the shares of existing shareholders continue to be $10, even after the new investor purchases 200 shares of this mutual fund.

Open-Ended Mutual Funds – Advantages and Disadvantage

Some of the advantages of an open-ended mutual fund are access to liquidity to investors at any time, diversified portfolio (which helps to reduce investment associated risks and provide an attractive combination of risk and reward), availability of various systematic options to invest in such funds, and investors can track the past performance of these funds (which facilitates prudent investment decision-making). Further, these funds are professionally managed. However, open-ended mutual funds are not always the most tax-friendly investment vehicles.