Open-End Funds (Mutual Funds)

Now that you understand the ICA classification system, let's examine the most common type of investment company: the open-end management company, better known as the mutual fund.

How Open-End Funds Work

  • Continuously issue and redeem shares - there is no fixed number of shares outstanding
  • New shares are created when investors buy; shares are retired when investors redeem
  • Investors buy shares from the fund company and sell them back to the fund company (not on an exchange)
  • Cannot be purchased on margin or sold short

Exam Tip: Gotchas

  • You cannot buy mutual funds on margin or sell them short. They are not exchange-traded, so these strategies do not apply.

Net Asset Value (NAV)

The Net Asset Value (NAV) is the per-share value of a mutual fund:

NAV = (Total Fund Assets - Total Fund Liabilities) / Number of Outstanding Shares

  • Calculated once daily after markets close
  • The NAV determines the price at which shares are bought and redeemed

Example: A fund has $100 million in assets, $2 million in liabilities, and 5 million shares outstanding:

  • NAV = ($100M - $2M) / 5M = $19.60 per share

Forward Pricing

Think of it this way: Buying mutual fund shares is like ordering food at a restaurant where the menu has no prices. You commit to the order, and the bill is calculated at closing time. Everyone who ordered that day pays the same price.

Mutual funds use forward pricing - meaning investors don't know the exact price when they place their order:

  • All orders received before 4:00 PM ET get that day's closing NAV
  • All orders received after 4:00 PM ET get the next business day's closing NAV
  • This is fundamentally different from stocks, which trade at real-time market prices throughout the day

Exam Tip: Gotchas

  • Forward pricing means the NAV has NOT yet been calculated when you place your order. You commit to buying at whatever the NAV turns out to be at the 4:00 PM calculation. This is unique to open-end funds.
  • Forward pricing applies to ALL mutual fund transactions; there is no way to lock in a specific price.

Public Offering Price (POP)

The Public Offering Price (POP) is what an investor actually pays to purchase mutual fund shares:

POP = NAV + Sales Charge (Load)

  • For no-load funds: POP = NAV (no sales charge)
  • For load funds: POP is higher than NAV by the amount of the sales charge

Example: A fund has an NAV of $20.00 and a 5% front-end load:

  • POP = $20.00 + $1.05 = $21.05

Exam Tip: Gotchas

  • Mutual fund shares are bought at POP but redeemed at NAV - not the other way around.

Redemption Rules

  • Investors redeem (sell) shares back to the fund at NAV (not POP)
  • The fund must redeem shares within 7 calendar days of receiving a proper redemption request
  • This 7-day redemption requirement protects investors from funds that might delay payouts

Exam Tip: Gotchas

  • The 7-day redemption deadline is measured in calendar days, not business days.