# Open-End Fund: Definition, Example, Pros and Cons

> **Definition**
>
> An open-end fund is an investment vehicle that creates and redeems shares based on investor demand, pooling money into a diversified portfolio without a fixed share limit.

## What Is an Open-End Fund?

An open-end fund allows investors to contribute money into a shared, professionally managed portfolio of securities, with the fund creating new shares as needed to match demand. The fund sponsor sells shares directly to investors and redeems them as well. These shares are priced daily based on their net asset value (NAV). Most mutual and exchange-traded funds (ETFs) are open-end.

They are also more common than their counterpart, closed-end funds, and make up the bulk of investments in 401(k) plans.

### Key Takeaways

*   An open-end fund is an investment that uses pooled assets, allowing for ongoing new contributions and withdrawals.
*   As a result, open-ended funds have a theoretically unlimited number of potential shares outstanding.
*   Most mutual funds and exchange-traded funds are open-end funds.
*   Open-end mutual fund shares do not trade on exchanges and are priced at their portfolio's net asset value (NAV) at the end of each day. ETFs trade throughout the trading day.

![Open-end fund infographic.](https://www.investopedia.com/thmb/TIbvqKkc8YcSWmUzKmCFYM6AIEs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Open-EndFund-83c3c677c37c48e3844eca36f9e9c3b4.png)

*— Investopedia*

## How an Open-End Fund Works

An open-end fund issues shares if buyers want them. It's always open to investment. Purchasing shares causes the fund to create new replacement shares, while selling shares takes them out of circulation.

Shares are bought and sold on demand at their [NAV](https://www.investopedia.com/terms/n/nav_return.asp). The daily basis of net asset value is based on the value of the fund’s underlying securities and is calculated at the end of the trading day for mutual funds. If a large number of shares are redeemed, the fund may sell some of its investments to pay the selling investors.

An open-end fund provides investors with an easy, low-cost way to pool money and buy a diversified portfolio. Investment goals for open-end funds include holding growth, income, large-cap, and small-cap stocks, among many others. The funds can target specific industries or countries. Investors typically do not need a lot of money to gain entry into an open-end fund.

Occasionally, when a fund's investment management determines that its total assets have become too large for its goals, the fund is [closed to new investors](https://www.investopedia.com/terms/c/closed-to-new-investors.asp). In rare cases, the fund's investors instigate the move to be a closed-end fund.

Open-end funds are so familiar, virtually synonymous with mutual funds, that many investors may not realize they are not the only type of fund in town. That's because most mutual funds and ETFs are open-end, though pooled investments were historically closed-end until the 1970s.

## Open-End Funds vs. Closed-End Funds

[Closed-end funds](https://www.investopedia.com/terms/c/closed-endinvestment.asp) launch through an initial public offering and have shares on exchanges. They price trades at a discount or premium to the NAV based on supply and demand throughout the trading day.

[Closed-end funds cost more](https://www.investopedia.com/articles/mutualfund/05/introtoclosed.asp) at times, given wider [bid-ask spreads](https://www.investopedia.com/terms/b/bid-askspread.asp) for illiquid funds. Occasional volatility means their price could be higher or lower than its NAV would indicate. Closed-end fund shares must be traded through a broker.

## Pros and Cons of Open-End Funds

Both open- and closed-end funds are run by [portfolio managers](https://www.investopedia.com/terms/p/portfoliomanagement.asp) with the help of analysts. Both types of funds mitigate security-specific risk by holding diversified investments and having lower investment and operating costs because of the pooling of investor funds.

Open-end funds must maintain ample cash reserves to meet shareholder redemptions. Since these funds must be kept in reserve and not invested, their yields can be lower, all else being equal. Open-end funds typically provide more security, while closed-end funds offer a bigger return.

Because management must continually adjust holdings to meet investor demand, the fees for these funds can be higher than those for other funds. Investors in open-end funds enjoy greater flexibility in buying and selling shares since the sponsoring fund family always makes a market in them.

Pros

*   Hold diversified portfolios, lessening risk
    
*   Offer professional money management
    
*   Are highly liquid
    
*   Require low investment minimums
    

Cons

*   Must maintain high cash reserves
    
*   Charge high fees and expenses (if actively managed)
    
*   Post lower yields (than closed-end funds)
    

## Example of an Open-End Fund

Fidelity's Magellan Fund, founded in 1963, became legendary during the late 1970s and 1980s for regularly beating the stock market. Its portfolio manager from 1977 to 1990, [Peter Lynch](https://www.investopedia.com/articles/stocks/06/peterlynch.asp), became a household name.

The fund became so popular that in 1997 it closed to new investors due to the difficulty of managing its large asset base. The fund eventually peaked in the late 1990s/early 2000s at approximately $100 billion. It reopened in 2008.

## Can You Sell Back Shares of an Open-End Fund?

Yes, generally, investors can sell their shares back to the fund at any time based on the present NAV.

## Are Open-End Funds Regulated?

Yes, open-end funds are subject to regulatory oversight to protect investors, typically by government bodies like the U.S. Securities and Exchange Commission.

## Do Open-End Funds Pay Dividends?

Yes, open-end funds may pay dividends from the income generated by their investments, which can be reinvested or paid to investors.

## What Impact Do Investor Redemptions Have on an Open-End Fund?

Investor [redemptions](https://www.investopedia.com/terms/r/redemption.asp) can lead to the fund selling assets to meet withdrawal demands, which may affect the fund's composition and performance.

## The Bottom Line

Open-end funds are a popular choice for investors seeking diversification and flexibility. They allow for unlimited shares and are priced in relation to the NAV.

The NAV is calculated only at the close of trading each day for open-end mutual funds. While they offer significant advantages such as liquidity and a wide range of investment options, potential drawbacks include management fees and the impact of redemptions on the fund's performance.  

> **Article Sources**
>
> 1.  Investment Company Institute. "[Release: Quarterly Retirement Market Data: Fourth Quarter 2024](https://www.ici.org/statistical-report/ret_24_q4)."
>     
> 2.  Ed Moisson, “[The Economics of Fund Management](https://www.cambridge.org/core/books/economics-of-fund-management/BDC003722BE6B045A76F73B6E9676B17),” Pages 142–4, 148–9, 157, 235. Agenda Press, 2024.
>     
> 3.  Kiplinger. "[Fidelity Magellan ETF (FMAG): A Legend at a Lower Cost](https://www.kiplinger.com/investing/etfs/602409/fidelity-magellan-etf-fmag-a-legend-at-lower-cost)."
>     
> 4.  Fidelity. "[Fidelity Magellan Fund](https://fundresearch.fidelity.com/mutual-funds/view-all/316184100)."