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 $98 million in net assets (total assets minus total liabilities) and 5 million shares outstanding:

• NAV = $98M / 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. Shares bought or sold on an exchange, such as closed-end fund shares, do not use it.
• 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 sales charge of $1.05 per share:

• POP = $20.00 + $1.05 = $21.05
• The investor pays $21.05 to buy a share and receives the NAV, $20.00, to redeem it

Exam Tip: Gotchas

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

Try it: See how NAV, the sales charge, and POP fit together with the NAV / POP / Sales Charge Calculator.

Redemption Rules

• Investors redeem (sell) shares back to the fund at NAV (not POP)
• The fund must pay redemption proceeds within 7 calendar days of receiving a proper redemption request
• This 7-day redemption requirement protects investors from funds that might delay payouts
• The 7 days is a legal maximum on the fund, not the normal trade settlement cycle

Exam Tip: Gotchas

• The 7-day redemption deadline is measured in calendar days, not business days. Weekends count. A request made on a Wednesday is due by the following Wednesday, not the following Friday (which is 7 business days out).

Fund Investment Objectives

Every mutual fund states its objective in the prospectus. This is a different classification axis from the structural categories you have already seen (UIT, DPP, management company): structure describes how the vehicle is built and governed, objective describes what the fund is trying to accomplish with the money inside it.

Exam Tip: Gotchas

• A balanced fund holds both stocks and bonds in one portfolio. A growth and income fund is still all-equity; it just blends growth stocks with dividend payers. The word "balanced" is the signal that more than one asset class is involved.
• Objective is not structure. "Balanced" says what the fund holds. It does not say how the fund is built. A balanced fund sold as a mutual fund is an open-end management company: it continuously issues and redeems shares, has a board and an adviser, and prices at NAV. But a closed-end fund or a UIT can also hold a stated mix of stocks and bonds.
• A mutual fund is not a UIT (no board, no adviser, fixed portfolio) and not a direct participation program (DPP), which is a limited partnership passing through tax items, not a pooled security priced at NAV.
• If a question describes a fund holding both stocks and bonds, that tells you the objective. Look for other clues, such as continuous redemption at NAV or a trading price, to decide whether the vehicle is open-end, closed-end, or a UIT.

What Should You Check on Exam Day?

• Can you state the formula for net asset value?
• Do you know the difference between forward pricing before and after 4:00 PM Eastern Time?
• Can you explain why mutual funds are bought at the public offering price but redeemed at net asset value?
• Do you know the redemption deadline for mutual fund shares, in calendar days?
• Can you explain why a balanced fund holds both stocks and bonds while a growth and income fund is all-equity?