Open-End

Lesson

Open-end mutual funds allow investors to pool their money together to invest in a diversified portfolio of securities. These funds issue new shares as investors buy in and redeem shares as investors sell out, making them highly liquid and easily accessible for individual investors.

Practice Question #1

Which of the following best describes an open-end mutual fund?

A) A fixed number of shares traded on an exchange

B) A basket of securities traded on an exchange

C) A continuously issued and redeemed investment fund

D) A fixed portfolio of securities for a specified period

Select an option above to see an explanation here.

A) This describes a closed-end fund. B) This describes an exchange-traded fund (ETF). C) This is the correct definition of an open-end mutual fund. D) This describes a unit investment trust (UIT).

Terms

Open-end mutual fund:: A type of investment fund that continuously issues and redeems shares based on investor demand.
Net asset value (NAV):: The value of a mutual fund's assets minus its liabilities, divided by the number of outstanding shares.
Expense ratio:: The annual fee charged by a mutual fund to cover its operating expenses, expressed as a percentage of the fund's assets.
Load:: A sales charge or commission an investor pays when buying or selling shares in a mutual fund.
No-load fund:: A mutual fund that does not charge a sales commission.
12b-1 fee:: A fee charged by some mutual funds to cover marketing and distribution expenses.
Redemption fee:: A fee charged by some mutual funds when an investor sells shares within a specified time period after purchase.
Prospectus:: A legal document that provides detailed information about a mutual fund, including its investment objectives, risks, fees, and performance history.

Practice Question #2

What is the primary purpose of diversification in an open-end mutual fund?

A) To increase returns

B) To reduce risk

C) To lower fees

D) To improve liquidity

Select an option above to see an explanation here.

A) Diversification does not guarantee increased returns. B) Diversification helps to spread investments across a wide range of assets, reducing risk. C) Diversification does not directly affect fees. D) Diversification does not directly affect liquidity.

Do Not Confuse With

Closed-end fund:: A type of investment fund that issues a fixed number of shares traded on an exchange like stocks.
Exchange-traded fund (ETF):: A type of investment fund that holds a basket of securities and is traded on an exchange like a stock.
Unit investment trust (UIT):: A type of investment fund that holds a fixed portfolio of securities for a specified period of time.

Practice Question #3

Which of the following fees is NOT typically associated with open-end mutual funds?

A) Load

B) 12b-1 fee

C) Management fee

D) Bid-ask spread

Select an option above to see an explanation here.

A) Loads are sales charges or commissions investors pay when buying or selling shares in a mutual fund. B) 12b-1 fees are charged by some mutual funds to cover marketing and distribution expenses. C) Management fees are part of a mutual fund's expense ratio, which covers operating expenses. D) Bid-ask spreads are associated with trading stocks and ETFs, not open-end mutual funds.

Real-World Example

Jane wants to invest in a diversified portfolio of stocks but does not have the time or expertise to manage her investments. She decides to invest in an open-end mutual fund, which allows her to pool her money with other investors and have a professional portfolio manager make investment decisions on her behalf.