An open-end Investment company is a type of investment company responsible for the management of open-end funds. Since the capitalization of the open-end investment company is open, the number of shares outstanding changes on a daily basis.
Open-end management companies manage both open-end mutual funds and exchange-traded funds (ETFs).
Key Points
An open-end management company manages open-end funds, such as open-end mutual funds and exchange-traded funds (ETFs).
Open-end mutual funds are not traded on exchanges; the open-end management company is responsible for distributing and redeeming all of the shares of open-end mutual funds offered in the market.
ETFs offered by open-end management companies also do not have a specified number of shares offered, meaning the open-end management company can issue and redeem shares at their discretion.
Open-end funds and ETFs do have many similarities; both are pooled funds allowing for management and operational economies of scale.
Objectives of Open-end Investment Company
The objectives of the investment company depend upon the style of the investment. Some companies are designed as substitutes for their shareholders’ portfolios, others expect their shareholders to own other securities.
However, the majority of the funds have the following objectives:
Capital gain: Capital gain refers to the appreciation of the value of assets in the market. When the market prices of the assets exceed the purchase prices capital gains occur.
One of the objectives of the funds is to increase the value of the assets of the funds in the market.
Growth: Growth refers to the diversification of the portfolio assets with the expectation of achieving large capital gains for the shareholders.
Income: Income refers to the distribution of money to the shareholders during a shorter period of time. Income funds concentrate on high-interest and high dividends.
Growth and income: Growth and income refer to the capital gains and dividend income generated by the funds.
Balanced funds: The objective of balanced funds is to make a diversified portfolio of common stocks, preferred stocks, and bonds for the expectation of capital gains, dividends, and interest income.
Industry-specific: The objective of the funds is to make investments in a particular sector or industry for the development of the industry.
How does an Open-End Investment Company Works?
An open-end management company is a type of management investment company as classified by the Investment Company Act of 1940.
Investment companies are classified into three basic categories:
- Face-amount certificate company
- Unit investment trust
- Management (investment) company.
Open-end management companies are most often associated with the management of open-end mutual funds. However, they also manage ETFs too.
Vanguard is one example of an open-end management company.
Open-end funds are open, meaning that they can continually bring on new investors and new investment capital rather than being closed at some point where they no longer bring on new investors or capital.
All capital is pooled from the various investors.
Types of Open-End Investment Company
Mutual Funds
Open-end mutual funds are not traded on exchanges. Therefore, the open-end management company is responsible for distributing and redeeming all of the shares of open-end mutual funds offered in the market.
Open-end mutual funds do not have a specific number of shares offered in the market.
These funds are sold and redeemed at their daily net asset value (NAV) per share. Investment company rules and regulations require transactions for open-end mutual funds to take place at their forward NAV.
This means buyers and sellers can expect to transact at the next NAV following their transaction request.
Exchange Traded Funds (ETFs)
ETFs are also offered by open-end management companies, and as characteristics of such funds, do not have a specified number of shares offered in the market. Therefore, the open-end management company can issue and redeem shares at its discretion.
ETFs differ from open-end funds in that they trade actively throughout the day on an exchange like stocks. They do not offer a range of share classes with different fee schedules, but rather, investors buy ETFs through brokers or on brokerage platforms.
