Open-Ended funds: An introduction to financial flexibility.
Open Ended Funds are those funds where investors can enter and exit the investment as per their convenience. The units can be purchased and sold even after the initial offering period and are priced at the latest NAV (Net Asset Value) as declared by the fund.
What are the differences between Open-Ended Funds and Closed-Ended Funds?
Closed-ended funds
A closed-end fund is one when an investment company raises money through an offering and then the tokens (or shares) are traded on the secondary exchange.
The fund raises capital from investors at the beginning of its life; once that subscription period is over, the fund is ‘closed’. This means that no new capital can enter the fund, and existing capital can’t exit the fund. Most private equity funds and venture capital funds are examples of closed-end funds.
Open-ended funds
Open-ended funds allow for ongoing subscriptions and redemptions. This allows capital to flow more freely in and out of the fund, and not just at the start and the end of the fund’s life. Often, the fund does not have a pre-determined lifespan and will continue indefinitely. Most mutual funds and hedge funds are examples of open-end funds.
Think of the differences between the two as the differences between travelling in a car ride down the highway and a train.
A car down the highway (Closed ended fund) between two locations starts from point A and goes till point B. Once, you get on the car in the highway, it does not stop till the destination. There are no stops along the way for you to enter or exit.
A train, on the other hand (Open-ended fund), passengers aren’t limited to the first and last stops on the line. There are regular, pre-determined stations throughout where they can board or alight.
What should you know before your first Open-ended fund investment?
Regular liquidity
It allows investors to enjoy regular liquidity. Additionally, instead of selling tokens on a secondary marketplace, where the market price fluctuates with supply and demand, the investor can redeem tokens directly from the fund at net asset value
Security
Open-ended funds usually maintain large cash reserves as a portion of their portfolios to meet shareholder redemptions.
Flexibility
With the option to enter and exit investments at investors’ convenience, there is a lot of investment flexibility allowing for investors to better manage their finances without the fear of lengthy lockup periods.
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