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One of the most common questions we receive asks for a definition of an open-end fund and a definition of a closed-end fund.

An open-end fund is a collective investment scheme that can issue and redeem shares according to market demand. Therefore unlike a closed-end fund, where the number of shares in issue is fixed at the outset, an open-end fund expands and contracts according to market demand. An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders, which would be the situation with a close-end fund.

Open-ended funds are available in most developed countries, but are often called by different names. For example in the US the are called “mutual funds”, in the UK they could be “Unit Trusts” or “Open Ended Investment Companies”, and in Europe a common structure is the Luxemburg SICAV (“Societe d’Investissenent a Capital Variable”). Hedge Funds and exchange-traded funds are also examples of open-ended funds.

The price at which shares in an open-ended fund are issued or can be redeemed will vary in proportion to the NAV or net asset value of the fund (the value of the fund’s assets minus liabilities divided by the number of shares in issue) and therefore directly reflects the fund’s performance. The NAV is calculated at regular intervals typically daily, weekly or monthly.

Most open-end funds are actively managed, meaning that a portfolio manager picks the securities to buy, although index funds are now growing in popularity. Index funds are open-end funds that attempt to replicate an index, such as the S&P 500, and therefore do not allow the manager to actively choose securities to buy.

See also Closed-End Funds

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