Open-End Investment Companies
Description
This article is from the What Every Investor Should Know.
Open-End Investment Companies
An open-end investment company--usually known as a mutual fund--is a company with a' portfolio of securities managed in accordance with stated investment objectives and policies that will buy back shares from investors whenever the investor wishes to sell. The redemption price depends upon the value of the company's portfolio at that time (the "net asset value"). There is no secondary trading market for the shares of such companies. A "money market" fund is an open-end investment company that seeks to pay a dividend daily and to maintain a stable net asset value or price per share by investing in short-term debt instruments. A "fund complex" consists of affiliate funds that have different strategies.
When the selling price of the shares of an open-end company includes a sales charge or "load," the company is known as a front-end load fund. Some funds have sales charges that are imposed only upon a redemption of shares. The amount of the charge may depend upon the length of time the shares have been held, in which case the charge is referred to as a contingent deferred sales load. Other funds may levy a sales charge against a shareholder's account for a number of years. Shares of all these companies may be purchased through broker-dealers who receive part of the sales charge. An open-end investment company is known as a no-load fund if no sales charge is included in the selling price of its shares, or deducted from the proceeds of a redemption of its shares. Shares of a no-load fund usually may be purchased directly from the investment company or its underwriter. Broker-dealers who sell shares of a no-load company may charge only a nominal fee for their services. Currently, however, both load and no-load funds may impose continuing charges (Rule 12b-1 fees) to support share distribution through advertising, payments to broker-dealers, etc. In addition, some funds may charge a redemption fee that may not exceed 2%. Newspaper listings of mutual fund share prices often indicate the presence or absence of these various charges, and a mutual fund prospectus includes, immediately after the cover page, a table showing fees and expenses charged individual shareholders or to the fund itself.
The investor considering an open-end company should compare funds and complexes of funds for various features, costs, and services. Some of the companies that belong to a fund complex allow shareholders to switch readily from one fund in the complex to another--at a minimal or nominal charge. For example, a shareholder may be allowed to switch from a money market fund to a fund specializing in equity investments.
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