What are the differences between closed- and open-ended mutual funds?
The first mutual funds were originally issued as closed-end investment funds. This structure is still used today, but the vast majority of mutual funds are structured as open-end investment funds. The following criteria provide a basic outline of closed-end and open-end mutual funds:
- Closed-end investment funds are structured as a corporation that issues common shares to investors and those shares are bought and sold on an organized stock exchange.
- Open-end investment funds are structured either as a Corporation or Trust whose common shares or units are bought and sold directly with the issuing company. Most mutual funds permit purchases and sales at any time, but some investment funds do restrict purchases and sales.
- Unlike a closed-end fund, open-end funds can suspend or postpone payments for redemptions and they can close the fund to new investors at anytime.
- Mutual funds begin like any other business corporations by issuing common shares or units either by way of a Initial Public Share Offering or a Private Placement of shares.
- For closed-end funds issued and outstanding shares trade on an organized exchange, whereas open-ended funds buy and sell as many shares or units as required by investor demand.
- Closed-end investment funds provide their asset managers with greater flexibility in making investment decisions in the sense that they need not worry about having to sell assets to meet investor redemption requests. This is because the closed-end fund shares trade on an exchange between investors, whereas open-end fund investors buy and sell directly with the fund itself.