What it means
The defining feature is that there is no fixed number of units. If you invest $10,000 on a Tuesday, the fund creates new units for you at that day's valuation and puts your cash to work; if you redeem, it cancels units and pays you out from the fund's assets.
This is the opposite of a closed-end fund, which issues a fixed number of shares that then trade between investors on an exchange. Because a closed-end fund's price is set by supply and demand, it can trade at a discount or premium to the value of what it owns, while an open-end fund by construction cannot.
For anyone with a workplace pension or an index tracker, this is almost certainly the structure their money sits in. It matters because it guarantees an exit at a fair value, which is why it became the default wrapper for mainstream long-term savings.
Open-end funds usually price once a day, after markets close, and every order received before the daily cut-off gets that same price. That single figure is the net asset value per unit, and it is the number that appears on your statement.
The structural weak spot is liquidity mismatch. If a fund promises daily redemptions but holds assets that take weeks or months to sell, such as commercial property or small unlisted companies, a rush of withdrawals can force the manager to suspend dealing until assets can be sold in an orderly way.
In practice
Real-world examples.
Example
An employee paying into a workplace pension buys units in an open-end global equity fund every payday. Each contribution creates new units at that day's net asset value, which is why the number of units on the statement keeps rising while the price per unit moves independently.
Example
A charity finance officer needs $500,000 from its bond fund holding to cover a grant. She submits a redemption before the noon cut-off, the fund cancels the corresponding units at that evening's valuation, and the cash settles a few days later.
Example
A property fund holding office buildings faces heavy withdrawals after a downturn. Because the buildings cannot be sold in days, the manager suspends dealing so that the investors who stay are not left holding only the least sellable assets.
Think of it
“Open-end fund creates and redeems shares on demand-always at NAV.
Formula
Calculation
Net asset value per unit = (total assets - total liabilities) / units in issue
A bond fund holds $860,000,000 of securities and cash, and owes $10,000,000 in accrued fees and unsettled trades. Net assets are therefore $860,000,000 - $10,000,000 = $850,000,000, and with 50,000,000 units in issue the net asset value per unit is $850,000,000 / 50,000,000 = $17.00.
An investor placing $34,000 into the fund before the daily cut-off receives $34,000 / $17.00 = 2,000 newly created units. The fund's net assets rise to $850,034,000 and the units in issue rise to 50,002,000, leaving the value per unit unchanged at $17.00.Case study
Seen in the real world.
Fenwick Income Partners is a fictional fund manager created to illustrate how open-end structures behave under stress. Its flagship open-end bond fund grew from $200,000,000 to $850,000,000 over four years as strong returns attracted steady inflows, and every new dollar simply created new units at the prevailing net asset value.
When interest rates rose sharply in the illustrative fifth year, investors redeemed $150,000,000 in six weeks. Because the fund held mostly liquid government bonds, it met every redemption at net asset value without suspending dealing, though selling into a falling market locked in losses for the remaining holders.
The fictional contrast is Fenwick's smaller property fund, which held the same promise of daily dealing against buildings that took nine months to sell. It suspended redemptions within a fortnight, and the episode is a reminder that the open-end promise is only as good as the liquidity of what the fund owns.
Watch out
Common mistakes.
- Believing you buy an open-end fund from another investor. You transact with the fund itself, which creates or cancels units to match your order.
- Expecting an intraday price. Most open-end funds price once a day, so an order placed at nine in the morning still gets the evening valuation.
- Assuming daily dealing means the underlying assets are liquid. The dealing terms and the asset liquidity are separate things, and the gap between them is where suspensions come from.
Questions
People also ask.
Can an open-end fund trade at a discount to its assets?
No, that is a closed-end fund feature; open-end units are always transacted at net asset value plus or minus any stated charges.
What happens if everyone redeems at once?
The manager sells assets to meet withdrawals, and if that cannot be done fairly the fund can suspend dealing until it can.
Is an exchange-traded fund open-ended?
Most are open-ended in structure, but units are created and redeemed in large blocks by authorised firms while ordinary investors trade on an exchange.
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