What are Open-end and Close-end Funds?

Since your obsession with the “Money Honey” is kicking into high gear, you have decided to commit to the next level of obsession and actually turn on the volume when she speaks. Now as an active listener you realize that assistance is needed to decipher some of the investment language she uses and your first step is figuring out what open-end and close end funds are.

Since the 1940 Investment Company Act there are three types of legally established investment companies in the United States. They are open-end management investment companies (mutual funds), closed-end management investment companies (closed-end funds) and UITs (unit investment trusts).

Open-end funds have existed since 1924. An open-end fund is another name for a mutual fund that is a type of collective investment. Open-end funds are an assortment of stocks, bonds, short-term money market instruments, and/or other securities bundled into one little package. Shares can be issued and redeemed at any given time.

Close-End funds are also a type of collective investment scheme, but the main difference is that these types of funds have limited shares usually only issued when the fund is launched and can only be redeemed when the fund liquidates. They are not as commonly known as open-end funds, but they too tend to be managed by a funds company that decides how the money is invested. These shares usually trade on the stock market.

Some of the main differences between open-end funds and close-end funds are:

OPEN-END FUNDS

  • Bough/sold through mutual fund companies
  • Share quantities are not limited
  • Financial burden shared by all investors
  • Redeemable at any time

CLOSE-END FUNDS

  • Exchange-traded funds
  • Fixed number of shares
  • Commission based trading
  • Redeemable upon fund liquidation

With your new-found knowledge regarding open-end funds versus close end funds, turn up the volume with confidence. Now when the “honey” speaks, you will also be hypnotized by her intelligence.