Mutual funds come in two accessibility categories: open end funds and closed end funds.

Open End Funds

Open end funds are entered and exited directly through the mutual fund itself. The mutual fund continuously sells shares to purchasing investors. If investors want to exit, they sell the shares they bought directly to the fund. These fund categories are extremely common, covering the vast majority of mutual funds available on the market. Part of the reason for their popularity is their easy accessibility. These funds issue unlimited shares to meet demand, supply is never an issue.

Open End Funds and NAV

It also is never a factor on share price: Open ended funds always sell their shares at their Net Asset Value. Your purchase of shares from an open ended fund increases the fund’s size by your investment after the front end loads are deducted. When exiting the fund, you will sell your shares back to the fund itself for the current Net Asset Value minus back end load fees. This usually comes from the cash redemption pool. If the manager does not have cash available, they will be forced to liquidate investments to acquire the currency to pay you.

Since all purchases into a fund occur at the Net Asset Value per Share, front end loads make all buy-ins at NAV constantly overvalued. Back end loads always reduce your withdrawals, increasing your losses or erasing parts of your gains. Your open end fund’s return needs to exceed the costs of the loads, annual operating expenses, and 12b-1 fees. You need to select funds which will provide the performance to cancel these costs. This is especially important with open end funds whose issue and redemption price is equal to net asset value.

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