Open End Funds Vs. Closed End Funds

An investment company pools money from multiple investors and uses those funds to purchase various securities such as stocks and bonds. Investment companies may be closed end funds or open end funds (commonly called mutual funds)---the difference lies primarily in how shares are issued and redeemed.

Function

Open end funds issue shares continuously and sell shares directly to investors. Closed end funds sell a limited number of shares, after which the fund is closed to new investors.

Features

If an investor wishes to purchase shares of an open end fund, the fund simply creates new shares. Closed end fund shares must be purchased from another investor on a secondary market.

Significance

Open end funds typically trade at their net asset value (NAV)---the fund's total assets divided by the number of outstanding shares. The share price of closed end funds is determined by supply and demand and could be above or below the fund's NAV.

Considerations

If you wish to redeem shares of an open end fund, you simply sell them back to the fund company. To sell shares of a closed end fund, you must find a buyer on the open market.

Warning

Both open end and closed end funds may have fees and sales charges, which will lower your return. All fees are listed in the fund's prospectus.

References

• SEC on Closed End Funds
• SEC on Mutual Funds