What Is an Investment Fund? Open-Ended vs Closed-End Funds

You have some spare capital and want to invest in the stock market, but doing so takes a lot of knowledge and you are too busy with work. Open-ended funds were created to help individual investors solve this problem. In essence, you entrust your money to a fund’s professionals to invest “on your behalf”, and in return the fund charges an asset management fee and takes a share of the profits. This is the first article in our series on the most common types of investment funds in Vietnam: open-ended funds.

What is an open-ended fund? How do you invest in one?

What Is an Open-Ended Fund?

An open-ended fund is an entity that raises capital from the public, uses it to invest in specified assets, and then distributes the profits back to its investors.

The Purpose of Open-Ended Funds

If you have money and want to invest it but don’t know how to do so sensibly, one option is to put it into an open-ended fund and let experienced fund managers invest for you. All you have to do is wait for the fund to distribute its profits.

How an open-ended fund works

Open-ended funds exist to serve the investment needs of many individuals. At the same time, the fund founders themselves do not have much capital but want to invest, so they set up a fund to raise capital from the public and generate more profit.

So both sides benefit. The fund generates more profit, while the individual investors share in those profits even though they don’t have much investment knowledge.

Open-Ended Fund Investment Strategies

Funds usually have different investment strategies, set out in the fund’s charter and closely supervised. The strategy specifies information such as the types of assets the fund will invest in and how long it will hold them. Each asset has a different level of risk and return profile. Fund managers are the brains of the fund; they directly use the money the fund has raised to invest in assets in line with the strategy.

VinaCapital open-ended fund charter

So when you want to invest in an open-ended fund, consider both your return expectations and your risk appetite, then choose funds whose investment strategy matches them.

Fund Units

Open-ended funds raise capital from the public by issuing fund units (fund certificates) and selling them to investors. A fund unit is therefore an asset showing that you have invested in the fund and are entitled to rights in proportion to your contribution.

Open-ended fund units are traded freely like stocks, with investors buying and selling among themselves and the fund taking part as well. That is why the value of a fund unit is always exactly equal to the fund’s net asset value (NAV) divided by the number of units outstanding. A fund’s NAV is the market value of its portfolio minus its total liabilities, and it is usually quoted per fund unit.

For example, a fund has total assets of VND 300 billion, of which VND 100 billion is debt. Its NAV is then VND 200 billion, and if it has issued 10 million fund units, its NAV will be quoted as VND 20,000 per unit.

Because the fund itself can buy back its units, and its assets are clearly valued by the market, the market price of a fund unit will always equal its NAV. Selling your units back to the fund is the same as withdrawing your money from it, the reverse of the fund issuing units and selling them to investors.

As with other assets, you can buy and sell fund units and profit from price differences. Because the price of a fund unit always equals the fund’s NAV, and the NAV depends on the assets in its portfolio, the unit price rises when the prices of those assets rise.

Related Fees

Trading open-ended fund units is similar to trading a stock: you pay transaction fees when you buy and sell units. In addition, one fee every fund charges is the asset management fee, which usually ranges from 1–3% of the total amount you invest. Management fees and redemption fees (for early withdrawal) are also worth weighing when you choose an open-ended fund.

Open-Ended vs Closed-End Funds

Open-ended funds let capital flow freely between the fund and its investors, who buy and sell units directly with the fund. With closed-end funds, once the units have been issued and sold to the public, investors cannot sell them back to the fund. They can only trade units on the secondary market, which means you can only withdraw your capital indirectly by selling your units to other investors who want to buy them, or when the fund matures.

This is an advantage for open-ended fund investors, because their capital is more flexible. However, it is something of a burden for fund managers, who must hold a cash reserve to buy back units from investors when needed, so their investments must be highly liquid. Closed-end funds are not required to buy back units, so they can use their capital for long-term investments. This creates a difference between the investment strategies of open-ended and closed-end funds.

Open-Ended Funds in Vietnam

Vietnam today has many open-ended funds with different investment strategies and a wide range of asset types. Some of the larger ones include:

• VEOF: VinaCapital’s open-ended fund, investing in large-cap stocks
• VCBF-BCF: Vietcombank’s open-ended fund, investing in large-cap, highly liquid stocks on HOSE and HNX.
• VFM funds: open-ended funds investing in stocks (VFMVF4, VFMVSF), bonds (VFMVFB) or a diversified mix of assets (VFMVF1).
• SSI-SCA: SSI’s open-ended fund, investing in stocks (80%) and bonds (20%).

How to Invest in an Open-Ended Fund

To invest in an open-ended fund, or buy units directly from the fund, visit the fund’s website. The fund will guide you through preparing the paperwork and transferring money to buy units. The simplest way is to go to the fund’s office in person, bringing the identity documents listed on its official website and the amount you want to invest. Fund staff will help you complete the paperwork.

Funds also support online account opening. Usually, the fund will ask for your personal details and the information needed for verification. You then transfer the amount you want to invest to the fund and visit the office to complete the paperwork, just as you would when opening a brokerage account.

You can also buy fund units from other investors over the counter (OTC).

Choosing an open-ended fund to entrust your money to is much simpler than analyzing and picking stocks. Study the fund’s investment strategy and past returns carefully, weigh them against your risk appetite, and then buy the units you want.

Investment performance of some open-ended funds in Vietnam

For example, say you are an office worker with a decent income who wants to use your savings to build long-term wealth. You have a low tolerance for risk and want to invest for the long run. In that case, you could choose bond funds or ETFs, aiming for sustainable long-term returns without taking on too much risk.

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