Closed-End vs. Open-End Mutual Funds

Mutual funds are investment companies that pool investor money to hold a portfolio of securities. Open-end and closed-end are the two types of mutual funds. The term "mutual fund" typically refers to the open-end variety, and closed-end funds are referred to as such. The number of closed-end funds is much less than the number of open-end funds, but they can provide some interesting investment opportunities.

Function

• An open-end mutual fund sells and redeems shares continuously. All buying and selling of shares are done through the fund and the purchase and redemption are completed at the daily share price (net asset value or NAV) of a fund, less any fees or commissions. Closed-end funds sell shares only once through an initial public offering, or an IPO. After the IPO, the shares will trade on a stock exchange. The fund company of a closed-end fund is not involved in the buying and selling of fund shares after the IPO.

Time Frame

• Closed-end fund shares trade on a stock exchange and can be purchased or sold throughout the market trading day. The market price of the shares will fluctuate during the market day. Open-end fund shares are only priced once a day, after the markets close. All purchase and redemption orders received during the day will be completed at the share price computed at the end of the day.

Values

• The shares of both open-end and closed-end funds have a calculated NAV. The NAV of a fund is the total value of the fund's securities portfolio divided by the number of shares outstanding. The shares of a closed-end fund can trade on the market at a premium or discount to the fund's NAV. The market price of a closed-end fund shares is set by supply and demand. Sometimes the market share price deviates significantly from the NAV. All purchase and redemptions for an open-end fund are based on the fund's NAV.

Potential

• There is a very large number of open-end funds for investors to choose from. The investment company institute lists over 6,000 stock funds and 2,500 bond funds. Investors can buy funds with a sales charge with broker advice or no-load funds if they want to do their own research. The Closed-End Fund Association lists about 650 funds on its website. Closed-end funds tend to be focused on specific market strategies where the fund manager can buy and sell securities without the consideration of share redemptions.

Considerations

• Open-end mutual funds provide investors with professional portfolio management and the ability to open an account, buy shares and add to an account and sell shares directly with the fund company. There is a large amount of research material available for open-end funds and novice investors can buy funds through an investment advisor if they want advice and assistance. According to the Yahoo Finance Mutual Fund Center, investing in closed-end funds requires investment experience and the ability to research non-mainstream investment choices and techniques. A stock brokerage account is required to invest in a closed-end fund.