Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value.
Open-end funds are required to calculate their net asset value (NAV)
daily. Since the NAV of an open-end fund is calculated daily, it serves
as a useful measure of its fair market value on a per-share basis. The
NAV of the fund is calculated by dividing the fund's assets minus
liabilities by the number of shares outstanding. Open-end funds usually
charge an entry or exit load from the investors.
Most of the open-end funds are actively managed and the fund manager
picks the stocks as per the objective of the fund. Open-end funds keep
some portion of their assets in short-term and money market securities
to provide available funds for redemptions. A large portion of most open
mutual funds is invested in highly liquid securities, which enables the
fund to raise money by selling securities at prices very close to those
used for valuations.
Some of the benefits of open-end funds include diversification,
professional money management, liquidity and convenience. But open-end
funds have one negative as compared to closed-end funds. Since open-end
funds are constantly under redemption pressure, they always have to keep
a certain amount of money in cash, which they otherwise would have
invested. This lowers the potential returns.