Open-End Fund Definition

An open-end fund is a diversified portfolio of pooled investor money that can issue an unlimited number of shares. The fund sponsor sells shares directly to investors and redeems them as well. These shares are priced daily, based on their current net asset value (NAV).

Mutual funds and exchange-traded funds (ETFs) are types of open-end funds. They are vastly more common than their opposite—closed-end funds—and they are the bulwark of the investment options in company-sponsored retirement plans, such as a 401(k).

An open-end fund issues shares as long as buyers want them; it is always open to investment—hence, the name, open-end fund. Purchasing shares creates new ones, whereas selling shares takes them out of circulation. Shares are bought and sold on demand at their net asset value (NAV), which is based on the value of the fund’s underlying securities and is calculated at the end of the trading day. If a large number of shares are redeemed, the fund may sell some of its investments to pay the investor.

An open-end fund provides investors an easy, low-cost way to pool their money and purchase a diversified portfolio reflecting a specific investment objective, such as growth or income. Investors typically do not need a lot of money to gain entry into an open-end fund, making the fund easily accessible for investment.

Occasionally, when a fund's investment manager(s) determine that a fund's total assets have become too large to effectively execute its stated objective, the fund will be closed to new investors, and in extreme cases, will be closed to additional investment by existing fund shareholders.

That scenario happened to one of the most famous open-end funds in the investment world, Fidelity's Magellan Fund. One of the investment company's eariiest funds, aiming at capital appreciation, it was founded in 1963; during the late 1970s and 1980s, it became a legend for regularly beating the stock market with its 29% annual returns. Its portfolio manager, Peter Lynch, was close to a household name. The fund became so popular, with assets hitting $100 billion, that in 1997, Fidelity closed it to new investors for nearly a decade. It re-opened in 2008.

Open-end funds are so familar—virtually synonymous with mutual funds—that many investors may not realize they are not the only type of fund in town; in fact, they aren't even the original type of fund. Closed-end funds are older than mutual funds by several decades, dating from 1893, according to the Closed-End Fund Center.

Both open- and closed-end funds are run by portfolio managers with help from analysts. Both types of funds mitigate security-specific risk by holding diversified investments, and by having lower investment and operating costs due to the pooling of investor funds.

However, an open-end fund has unlimited shares issued by the fund, whereas a closed-end fund has a fixed number of shares launched through an initial public offering (IPO) and sold on the open market. Closed-end shares trade on an exchange and are more liquid, prices trade at a significant discount or premium to the NAV based on supply and demand throughout the trading day.

Open-end funds must maintain cash reserves to meet redemptions. Since closed-end funds do not have that requirement, they may invest in illiquid stocks, securities or markets such as real estate. Closed-end funds may impose additional costs through wide bid-ask spreads for illiquid funds, and volatile premium/discount to NAV. Open-end funds typically provide more security, whereas closed-end funds often provide a bigger return.

Open-end funds investors enjoy greater flexibility in buying and selling shares, since the sponsoring fund family always makes a market in them, whereas closed-end funds demand that shares be traded through a broker. Most of the time, investors can also receive the intrinsic value price for the underlying assets of the portfolio when selling.