Open Ended vs Closed Ended Mutual Funds
A mutual fund is a pool of investor’s cash that is put together and managed by a mutual fund manager who is responsible to invest the funds in high yielding securities. Mutual funds typically invest in securities such as stocks and bonds and take care to ensure that the risk is diversified by investing in a number of different industries and asset classes. An individual investing in a mutual fund will contribute his investment into the fund and buy the fund’s shares, thereby becoming a shareholder of the fund, and he is entitled to a portion of profit made. There are two distinct types of mutual funds; which are open-end mutual funds and close-end mutual funds. The following article provides a clear overview of the two types of mutual funds and outlines the differences between the two.
What is Open Ended Mutual Fund?
In an open-end mutual fund, the numbers of shares that can be issued are not restricted. This means that any investor can invest in an open-end mutual fund and buy shares of the funds. In the event that an investor wishes to sell off his shares, the fund will buy back shares. Since open-end mutual funds do not have restrictions regarding the number of shares issued, the fund will grow and shrink from time to time as investors invest and withdraw their funds. Most mutual funds are open-ended and are quite popular due to the flexibility that is provided by being able to enter and exit the fund as needed.
What is Closed Ended Mutual Fund?
Close-end mutual fund is different to an open-end fund. Close-end funds are quite similar to public limited companies listed on a stock exchange, since a close-end fund will collect its fund pool (also known as capital) at the beginning by issuing shares through an initial public offering where these shares are purchased by those investing in the close-end mutual fund. Close-end mutual funds are different from stocks listed on a stock exchange because shares of close-end mutual funds represent a fund that is closely managed by a fund manager who will invest funds carefully in a particular asset/industry/sector.
Open Ended vs Closed Ended Mutual Funds
Open end and close end mutual funds are both similar to each other in the sense that they both represent pools of funds managed by a fund manager who will decide the best way to invest the funds. However, open-end and close-end funds are quite different to each other. An open-end mutual fund offers a large amount of flexibility where the investor can enter or exit the fund by buying shares and selling shares back to the fund. A close-end mutual fund is similar to a stock traded on an exchange where funds are collected by issuing shares through an IPO to interested investors.
Summary:
• A mutual fund is a pool of investor’s cash that is put together and managed by a mutual fund manager who is responsible to invest the funds in high yielding securities. There are two distinct types of mutual funds, which are open-end mutual funds and close-end mutual funds.
• In an open-end mutual fund, the numbers of shares that can be issued are not restricted. This means that any investor can invest in an open-end mutual fund and buy shares of the funds, and sell shares back to the fund to exit.
• A close-end mutual fund is similar to a stock traded on an exchange where funds are collected by issuing shares through an IPO to interested investors.