The advantages and disadvantages of open-end mutual funds are many. Mutual funds are classified as open-ended or closed-end. Closed-end fund shares trade on the open market and have a set number of shares. Open-ended funds will issue new shares based upon the fund's current net asset value when an investor wants to purchase them and redeem the shares when an investor wants to sell them. Open-ended funds always reflect the net asset value. The funds are actively managed by professional money managers and this important fact often eliminates the stress and time consumption of analyzing balance sheets and financial statement for investors.
Whereas open-ended funds provide an additional degree of flexibility relative to closed-end funds, they offer a reduced degree of oversight and control in comparison.
How Open-Ended Funds Work
A mutual fund is a company that pools money from its investors and then invests the money in stocks, bonds, money markets or other types of securities that are outlined in the company's prospectus. Open-end mutual funds come in many different varieties and sizes. Some are riskier than others. There are also different fees, distributions and expenses applied to each fund.
Buying and Selling
Investors can buy or redeem (sell) shares directly through the fund (unlike a closed-end fund). If an investor has an account at an investment firm, the transaction can be done there. Mutual funds are priced once per day, after the market closes. Although you can enter an order at any time, your trades are only executed at the daily closing price. You may have to pay a commission to buy or sell certain open-end mutual funds, although many are no-load.
Advantages of Open-End Mutual Funds
Open-end funds are more flexible than closed-end funds. Many funds allow the transfer or exchange among fund families without fees. Open-end funds allow for diversification and often have less risk than owning one specific stock. For funds that charge a commission, you can usually get a reduced rate if you invest more money.
Risks of Open-End Funds
As with any investment vehicle, there are risks. The price of the fund will fluctuate either up or down. Also, open-end funds may also be subject to sudden inflows or redemptions. Since open-end funds are only priced once per day, you can't get out of a fund right away in a rapidly declining market. You're also trusting an investment professional to make all of your investment decisions, since you have no control over the purchase or sale of individual securities.
Advantages Over Closed-End Funds
Investing in a closed-end fund is appropriate for a more experienced investor. Closed-end funds can often be very volatile because their value can greatly fluctuate. Shares can trade at a deep discount, and it can often be difficult to realize the true value of the shares.
Do Your Homework
Investing in any type of fund does involve some homework. Read the prospectus and check the fund's performance. Most closed-end funds are not trading instruments and are meant to be held for some period of time. Be careful not to buy or sell just before or after a dividend payment as you will be buying or selling the dividend. This is due to the fact that the price of the stock in question will often drop in proportion to the declared dividend amount on the ex-dividend date. Prices can vary greatly during this time and tax consequences should be considered.
Check Your Trade Confirmations and Statement
Look over those monthly or quarterly statements. Consider taking profits or cutting losses. Decide if it is prudent to stay with a particular fund or if it is time to move to a different one. Make sure your personal information is correct.