Chapter 2-5 Open vs Closed End Funds
One of the main distinctive characteristics of a mutual fund, or open-end fund, is that investors can purchase and sell shares any time. Funds make new shares to satisfy requests for raised sales and repurchase shares from investors who want to sell. At times, open-end funds get so big that they are not open to new investors. When an open-end fund is closed off to new investors, it still remains an open-end fund because current shareholders can continue purchasing and selling fund shares.
Open-end funds measure the amount of one share, referred to as the net asset value (NAV), once a day, at the market close. The total purchase and sales for the day are logged at that NAV. To calculate the fund’s NAV, it sums the entire amount of its investment holdings, subtracts the fund’s fees and expenses, and divides that total by the number of fund shares that investors hold at the present time.
Unlike stock prices, the NAV is not fundamentally an evaluation of a fund’s success. Because open-end funds can distribute new shares and repurchase old ones all the time, the number of shares and the dollars invested in the fund are always modifying. This is the reason that when you compare two funds it is more plausible to watch their total return over time instead of comparing their NAVs.
Closed-end funds vary from open-end funds due to the fact that they accumulate money only one time in a single offering. This is very much how a stock distribution accumulates money for the company only one time, for its initial public offering, also known as an IPO. When the shares are sold, the closed-end fund utilizes the money to purchase a portfolio of underlying investments, and any additional growth in the size of the fund is contingent on the return on its investments, not on new investment money. From there on, the fund is listed on an exchange, the manner in which a single stock is, and shares trade for the duration of the day.
Orders for the purchasing or selling of shares of a closed-end fund are arranged through your stockbroker. The cost for closed-end funds goes up or down as a result of investor request, and may be more or less than its NAV, which is the true value of the fund’s underlying investments for each share.
Specific load mutual funds let you purchase Class A shares without paying the front-end sales load if you purchase that fund using profits from the selling of shares in another mutual fund family for which you paid a front-end or back-end sales charge. These executions are called NAV transfers because you can buy Class A shares of a new fund at net asset value (NAV) without having to pay a front-end sales load. Even though NAV transfers are only provided by a restricted number of funds at this time, they can do away with the sales charges that you will pay when transferring among load funds in various fund families.
Typically, you have to sell shares of a fund from another fund family that you paid a primary sales charge or CDSC to qualify for an NAV transfer. The most prevalent share classes that charge a front-end load or CDSC are Class A, B or C shares. No-load mutual funds and a number of mutual funds that you do not pay a sales charge generally are not qualified for NAV transfers. The majority of funds that grant NAV transfers require you to invest the profits from the sale of a fund that you paid a sales charge within 30 to 90 days. A small number of funds permit an extended time period for an NAV transfer. Generally, only Class A shares of a fund can be bought through an NAV transfer.
Not all mutual funds that charge a sales load provide NAV transfers. You can learn if a mutual fund that you are buying provides NAV transfers by reading the prospectus and Statement of Additional Information (SAI). You will need to read thoroughly because the majority of mutual funds do not use the term NAV transfer. You can generally see information about NAV transfers in the part of these documents that explains about sales charge reductions and waivers. You may also be able to find information on NAV transfers by looking over a mutual fund company’s website or by speaking to your financial professional. Every mutual fund establishes its own acceptability stipulations for NAV transfers. These terms and conditions vary from one fund to another. You can get a prospectus and Statement of Additional Information (SAI) by contacting your broker or financial advisor, contacting or writing the mutual fund company, going to the mutual fund company’s website, going to the U.S. Securities and Exchange Commission’s EDGAR database, or calling the SEC’s Office of Public Reference.
However, an NAV transfer does not do away with all fund charges and costs. You will not pay a front-end sales charge if you purchase Class A shares with an NAV transfer, but a number of funds may charge a 1 percent CDSC if you sell your shares during a period of a year to 18 months following the completion of an NAV transfer. Class A shares also impose continuous managing expenses, which may consist of 12b-1 fees. The 12b-1 fees on Class A shares are typically less than the 12b-1 fees of Class B and C shares. As a result of the lower 12b-1 fees, the total annual fund operating expenses on Class A shares is typically less as well. For this reason, if you meet the requirements for an NAV transfer, Class A shares may be cheaper than Class B or C shares. 12b-1 fees are labeled after a Securities and Exchange Commission (SEC) rule. They are the fees that you do not pay immediately, but that are withdrawn from a mutual fund’s assets yearly to pay for the marketing and distributing expenses of the fund to investors. Similar to sales charges, 12b-1 fees can be utilized to compensate a broker or other investment professional. FINRA customarily analyzes mutual fund sales methods.
Prior to buying a new fund, inquire with your broker or financial advisor if the purchase will conclude in any other sales charges, more expenses or tax repercussion. You should also inquire if NAV transfers are possible and whether there are additional methods of lowering or doing away with sales charges. If you buy a new mutual fund, your broker must guarantee that you get any sales charge discount or waiver that you are eligible for. If you have already transferred between two distinct load funds, you may want to review with your broker to find out if you bought Class A shares and received any sales charge waivers or discounts that were accessible to you.