OPEN-END FUNDS: SUBSCRIPTIONS AND REDEMPTIONS EXPLAINED

Open-end funds are a common type of collective investment scheme that allows investors to pool their money together to invest in a diversified portfolio of securities. The defining characteristic of open-end funds is that they issue and redeem shares at their net asset value (NAV) on a continual basis. This means investors can buy into or sell out of the fund directly through the fund provider rather than on an exchange.

Mutual funds are a typical example of open-end funds, and they contrast with closed-end funds, which issue a fixed number of shares traded on stock exchanges. The flexibility of open-end funds makes them popular with retail investors seeking simplicity, diversification, and professional management.

Each share or unit in an open-end fund represents a proportional stake in the underlying assets of the fund. The total number of outstanding shares changes as investors subscribe (buy) or redeem (sell) shares, which is a key feature that defines fund operations and liquidity management. These actions depend entirely on the current NAV, which is typically calculated at the end of each trading day.

Open-end fund structures are used worldwide, with regional variants such as OEICs (Open-Ended Investment Companies) in the UK, SICAVs in Europe, and mutual funds in the United States. While fund administration and legal frameworks vary by jurisdiction, the core principles of subscriptions and redemptions remain consistent globally.

These funds are managed by professional asset managers employed by the fund house or investment firm. They make investment decisions on behalf of all shareholders according to the stated objectives of the fund, which might include growth, income, capital preservation, or a combination of these goals. The fees for management and administration are generally expressed as the annual expense ratio of the fund.

To maintain liquidity and fulfil redemption demands, fund managers may hold a portion of assets in cash or liquid instruments. Regulations typically mandate minimum liquidity thresholds to ensure the fund can meet daily redemption requests without destabilising the portfolio. This highlights the interplay between investor behaviour and portfolio construction in open-end funds.

In terms of governance, open-end funds are subject to regulation by financial authorities—for example, the Financial Conduct Authority (FCA) in the UK or the Securities and Exchange Commission (SEC) in the US. This regulation ensures transparency, investor protection, and adherence to investment objectives and risk disclosures.

Subscriptions, or purchases of open-end fund units, refer to the process by which investors enter the fund by acquiring newly issued shares. These transactions are typically executed through authorised distributors, platforms, or the fund company itself. When an investor decides to subscribe to a fund, they are effectively requesting to buy shares at the fund’s next calculated net asset value (NAV).

This NAV is calculated daily based on the value of the fund’s portfolio of underlying securities minus liabilities, divided by the number of shares outstanding. As such, the subscription price is only finalised at the end of the trading day, even if the order is placed earlier. This process ensures fair pricing for all investors entering or exiting the fund on the same day.

To subscribe, investors complete an application, remit the appropriate funds, and designate the number of units to purchase or the amount to invest. In international funds, foreign exchange considerations may apply based on the domicile of the investor or the currency denomination of the fund. Once processed, the investor becomes a shareholder of the fund, entitled to a proportion of distributions, if any, and exposed to the fund’s returns and risks.

Most fund houses set a cut-off time—commonly 12:00 pm or 3:00 pm local time—beyond which transactions are processed at the NAV of the next dealing day. This practice, known as 'forward pricing', ensures that all orders are processed without prior knowledge of that day’s NAV, thus prioritising investor fairness and integrity of execution.

Some open-end funds also impose initial sales charges (front-end loads) or transaction fees, although many no-load funds allow investors to enter without additional costs. Institutional investors may benefit from lower fees or custom terms based on the scale of investment and negotiated agreements.

Behind the scenes, once money is received and the NAV is determined, the fund issues new shares equivalent in value to the subscription amount. The capital raised is then deployed by the fund manager in accordance with its investment strategy. Liquidity management is crucial here—funds maintain enough cash or quickly marketable securities to avoid disrupting their performance during high subscription volumes.

Since open-end funds grow in size with each new subscription, fund managers may alter portfolio positions to accommodate new capital while adhering to the stated risk parameters and asset allocation frameworks. Performance may also be impacted by inflows, especially if they lead to a dilution of returns or force the purchase of assets at unfavourable prices.

Redemptions are the process by which investors in open-end funds sell their shares back to the fund and receive the equivalent value in cash, based on the NAV of the fund on the execution day. The open-end structure inherently allows investors to exit on demand, typically on a daily basis, which differentiates these vehicles from less liquid investment structures such as private equity funds or hedge funds.

Like subscriptions, redemption requests are submitted before a specified cut-off time to be fulfilled at the end-of-day NAV. Once the NAV is finalised, the fund initiates payment to the investor, usually within a T+1 to T+3 settlement period depending on jurisdiction and fund policy. The transaction retires (cancels) the redeemed units, reducing the number of outstanding shares in the fund.

To facilitate redemptions efficiently, fund managers maintain liquidity buffers, such as holding a portion of the portfolio in cash, money market instruments, or highly liquid securities. The size of this liquidity allocation depends on the fund's investment strategy, investor base stability, and market conditions. Funds experiencing consistent net redemptions may be forced to sell underlying assets, which could alter portfolio composition or adversely impact valuation.

During periods of market volatility or financial distress, large redemptions can become a systemic concern. To mitigate the risk of "run on the fund" scenarios, fund providers may implement temporary measures including:

• Redemption gates: Limiting the percentage of the fund that can be redeemed on a given day.
• Suspension of redemptions: Temporarily halting redemptions to preserve fund integrity.
• Swing pricing: Adjusting NAV based on trading activity to allocate transaction costs to redeeming investors.

These mechanisms are supported by regulatory bodies and designed to uphold investor protection and overall market stability. Swing pricing, in particular, is increasingly used in Europe and parts of Asia to counteract the impact of dilution and protect long-term investors.

Some funds, particularly those investing in illiquid assets such as real estate or private debt, may offer less frequent dealing (e.g., monthly or quarterly) or impose advance notice periods for redemption. This serves to align liquidity terms with the underlying portfolio’s liquidity characteristics.

Investors seeking redemption must also consider the potential effect on taxes, particularly in jurisdictions where capital gains are levied upon sale of fund shares. Redemption fees, when charged, are typically small and may help offset transaction costs incurred by the fund due to investor exits.

Ultimately, the redemption process highlights the dynamic relationship between investor flows and fund performance. Open-end fund managers must proactively manage inflows and outflows, balancing sufficient liquidity with full deployment of capital to meet investment objectives responsibly and efficiently.