 Personal Finance PowerPoint Presentation Open and Fund. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia Open and Fund, which you can find online. Take a look at the references, resources, continue your research from there. This by James Chen, updated December 11, 2021. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping in mind the two major categories of investments. That being the fixed income, typically the bonds, and the equities, typically the common stock. We also want to keep in mind other tools we might use. That includes the mutual funds, the ETFs, helping us to diversify using these tools as opposed to, for example, investing in individual stocks and individual bonds. Keeping that in mind, what is an Open and Fund? An Open and Fund is a diversified portfolio of pooled investor money that can issue an unlimited number of shares. The fund sponsors sell shares directly to investors and redeems them as well. These shares are priced daily based on their current net asset value. That's the NAV. Some mutual funds, hedge funds, and exchange traded funds, those are the ETFs, are types of Open and Fund. So we're typically thinking of a kind of tool that we would be using instead of investing, say, in the individual stocks. We're investing, say, in kind of a mutual fund, for example. So these are more common than their counterpart, close-end funds, and are the bulwark of the investment options in company-sponsored retirement plans, such as a 401k plan. So oftentimes, people's kind of first individual experience with investing is through, say, a 401k plan, because it's such a big benefit that the company can offer because there's going to be those tax benefits related to it. Oftentimes, people kind of think of the 401k, or you might have a 403b, or possibly be investing, say, in an IRA, for example. As though those kind of things, the 401k is the actual investment tool itself. But I would think of it more like the 401k plan is kind of like an umbrella over the normal kind of investment tools that you would have, such as some kind of mutual fund that is helping you to invest and diversify as you invest using the tool of, like, a mutual fund, which is pooling, like, the money together, for example, to get the diversification instead of buying the individual stocks. You could buy those similar kind of investment tools or strategies, mutual funds outside of the umbrella of a 401k plan. The reason you want to buy them within the 401k plan if you have the capacity to do that is not because the investment under the umbrella of the 401k plan is really different than what you can get outside of it, but because if you stick it under the umbrella, although it's restricted, you can't touch it, you can't take it out as easily as you could. Otherwise, you get that big, huge tax benefit and possibly some matching related to it, and that's why you put it into the 401k plan. Okay, so how an open end fund works? An open end fund issue shares as long as buyers want them, so it is always open to investment, hence the name, open end fund. So that's great when you're investing in something like a 401k plan because oftentimes you're going to be wanting to put money in it periodically. You might be trying to use some kind of fund that's going to help you to diversify in a very hands-off type of way so that you can invest possibly on a paycheck-by-paycheck basis, for example. Purchasing shares cost the fund to create new replacement shares whereas selling shares takes them out of circulation. Shares are bought and sold on demand at their NAV, that's the net asset value. The daily basis of the net asset value is on the value of funds underlying securities and is calculated at the end of the trading day. So if you're talking about kind of like a mutual fund oftentimes with an open end fund, you don't have the fluctuation in the price during the trading day, as you do say, for example, with individual stocks oftentimes, but you're going to value it based on the underlying assets within the fund on a periodic basis, typically at the end of the day. That's usually not a problem for investors that are investing, say, in a 401k plan because they don't need to be trading, you're not day trading during the day, so that's generally not a problem, but if you needed the funds, if you're trying to trade like these kind of packaged funds together or diversified tools together more like a stock, then you might be looking at some like kind of ETFs options for that. But again, generally, not generally a problem for like a 401k plan. For example, if a large number of shares are redeemed, the fund may sell some of its investment to pay the selling investors. So an open end fund provides investors an easy low-cost way to pool money and purchase a diversified portfolio reflecting a specific investment objective. So this is often, again, quite useful for like retirement, for example, because you're trying to diversify in basically a hands-off kind of way and have it pooling together to allow you to have that diversification even possibly with lesser investments than you otherwise could do if you were investing in individual stocks, individual bonds. Investing objectives include investing for growth or income and in large cap or small cap companies, among others. Further, the funds can target investment into specific industries or countries. So we've talked about this in general in terms of these kind of tools like mutual funds. There's different kind of specifications that you might be using in order to target your mutual fund, which could be specific regions, for example, or different kind of diversified portfolio, which we might get into in a little bit here. Investors typically do not need a lot of money to gain entry into an open end fund. That's the beauty of it. So if you bought individual stocks to diversify, it would be quite costly typically with a little bit of money. With these kind of tools, you can diversify more easily with that money, making the fund easily accessible for all levels of investors. Occasionally, when a fund's investment management determines that a fund's total assets have become too large to execute its stated objective effectively, the fund will be closed to new investors. So in extreme cases, some funds will be closed to additional investment by existing fund shareholders. Open end funds are so familiar, virtually synonymous with mutual funds. So we've talked about, obviously, mutual funds in the past. This is, you know, characteristic generally you can think of them as a type of open end fund oftentimes. So that many investors may not realize they are not the only type of fund in town. This type of investment fund is not even the original type of investment fund. Close end funds are older than mutual funds by several decades, dating back to 1893 according to the close end fund center. So the difference of close end funds. Close end funds launched through an initial public offering. That's going to be the IPO. So, you know, when a stock issues the initial public offering, generally that's what we think about with the IPO. Oftentimes they're actually issuing the stock from the company when you're thinking about an IPO as opposed to selling kind of on the secondary market, which is where most of the trading take place and sell on the open market. The close end fund shares trade on and exchange and are more liquid. They price trades at a discount or premium to the NAV. That's the net asset value based on supply and demand throughout the trading day. So now, instead of, as we talked about with the open ended funds, they're priced at the end of the day based on the value. So now we've got trading happening during the day, which again could give some benefit if you're trading these similar to how you would trade stocks on like a day trade kind of kind of situation, trading them more often. But for many long-term investors that might not be concerned for them because they're going to be investing and sticking with it for a longer timeframe, often times. Since close end funds do not have that requirement, they may invest in liquid stocks, securities or in markets such as real estate. So you could have different components or different capacities in that sense for the close end funds. Close end funds may impose additional costs through wide bid ask spreads for illiquid funds and a volatile premium discount to the NAV, the net asset value. Close end funds demand that shares be traded through a broker. So now you've got to go through the broker here. Most of the time, investors can also receive the intrinsic value price for the underlying assets of the portfolio when selling. Frozen cons of open end funds. Both open and close end funds are run by portfolio managers with the help of analysts. Both types of funds mitigate securities specific risk by holding diversified investments and by having lower investment and operating costs due to the pooling of investor funds. That's going to be the general idea here. We've got many people kind of investing. They're able to pool the money together. Although, of course, you do need a manager and analyst in order to take that pooled money and manage the fund, the degree of management in terms of what they're going to actually invest in could vary depending on the type of funds you are purchasing. For example, you might be purchasing more like index type of funds, which would limit the management to try to invest in accordance with say an index, for example. Or you might give the manager or tie the manager to a specific sector or something like that. Or give them more more leeway depending on your viewpoint of the management strategy and how much you want to pay for that. So an open end fund has unlimited shares issued by the fund and received an NAV net asset value at the end of the trading day. Investors who trade during a business day must wait until the end of the trading to realize any gain or losses from the open end fund. Also, open end funds must maintain large cash reserves as a portion of their portfolio. They do this in case they need to meet shareholder redemptions. So that's kind of a down point, you would think, to some degree, because they have to hold on to the cash reserves in order to pay out. And the whole point is that you're putting their money into the fund for them to invest the fund and generate revenue. Although having some money in cash might not be bad depending on your portfolio, how you're balancing your portfolio in any case either. So since these funds must be kept in reserve and not invested, the yields to open end funds are usually lower. Open end funds typically provide more security, whereas closed end funds often provide a bigger return. Because management must continually adjust holding to meet investor demand, the management fees for these funds usually are higher than other funds. Open end funds, investors enjoy greater flexibility in buying and selling shares since the sponsoring fund family always makes a market in them. So what are the pros? Hold diversified portfolios, lessening risks. That's the general idea of say kind of a mutual fund, smaller amounts of investment so that you can invest and have a diversified portfolio even with that smaller investment. Offer professional money management. So again, that would be dependent on how much management you want to pay for. So you might try to restrict the management, say invest in like more index funds or something or some sector, for example, or you might give the manager more leeway. But no matter what you do, they got to of course manage the fund. There's going to be fees related to that as well. Are highly liquid, so you could sell the funds generally if you need to. Although if they're under the umbrella of an IRA or 401K plan or retirement plan of any kind, typically, or most kinds, then or normal retirement plans, then you might be restricted in terms of when you could pull the money out. Require low investment minimums. So to start off the fund, you don't need a whole lot to start off the fund generally to get going. So what are the cons? Are priced just once a day so you can't be trading them like stocks on a day-by-day basis? Probably not a concern for many long-term investors, but could be an issue for some investors. Must maintain high cash reserves so you can think of that as a downside because they're not generating revenue on those cash reserves. Although in your portfolio in general, you want some cash in any case, so you got to just take that into consideration. Charge high fees and expenses if actively managed. So active management means you're going to give more leeway to the management to make decisions. You might try to restrict the management by having them invest in index funds or something like that, which means you will lower the fees typically to manage the portfolio just to do the management process, but they're going to try to tie it to indexes, for example, which are kind of like averages of the market. Post lower yields than close-end funds. So real-world example of an open-end fund. Fidelity Magalind Fund, one of the investment company's earliest open-end funds, aimed at capital appreciation. It was funded in 1963 and during the late 1970s and 1980s, it became a legend for regularly beating the stock market, so that's great. So it was outperforming. As of June 2021, it had a lifetime return of 16.14%. Its portfolio manager, Peter Lynch, was close to a household name. The fund became so popular with assets hitting US $100 billion that in 1997, Fidelity closed the fund to new investors for nearly a decade. It reopened in 2008.