Open- & Closed-End Funds

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Mutual funds come in two types: open- and closed-end.
Open-end funds sell an unlimited number of shares to fund shareholders. Open-end mutual funds sell their shares directly or through a brokerage firm. You buy and sell shares of an open-end fund at its net asset value, plus any brokerage commissions and other fees.
In comparison, closed-end funds sell a limited number of shares once. Investors trade shares of closed-end funds in the NASDAQ over-the-counter market, an electronic marketplace that is regulated by the National Association of Securities Dealers.
Since shareholders don't redeem shares of a closed-end fund, the fund is able to invest a greater share of its assets in securities that are less liquid than those which open-end funds invest in.
An open-end fund is required to calculate its net asset value daily by 4 p.m. Eastern Standard Time. Since an open-end fund values the holdings in its portfolio daily, the net asset value of an open-end fund is a useful barometer of its fair market value on a per-share basis. However, a closed-end fund that invests in illiquid securities may not receive daily valuations for all of its holdings. As a result, a closed-end fund's net asset value is often a less meaningful barometer of its fair market value.
Premiums and discounts
In addition, the fact that a closed-end fund has a finite number of shares often causes its actual share price to stray from its net asset value. As investors who think the actual value of the fund's holdings is greater than the fund's net asset value outnumber pessimistic investors, the fund's share price is bid up and trades at a premium to net asset value.
Similarly, as investors who think the actual value of the fund's holdings is less than its net asset value outnumber optimistic investors, the fund's share price falls and trades at a discount to net asset value.
Open-end mutual funds outnumber and outsize closed-end mutual funds by a considerable margin. There were over 8,000 open-end funds with assets of $12.08 trillion at the end of November 2007, according to the Investment Company Institute.
Assets of closed-end funds were $328 billion at the end of September 2007 -- about 2.72% of total assets held in open-end funds. Because of their relative dominance, the Investment Company Institute refers to open-end funds simply as mutual funds.
2008-07-21 14:38:04
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