Q: What is the difference between an open-end and a closed-end mutual fund?
–J. Basey, Covington, Kentucky
A: An open-end mutual fund is the kind most investors are familiar with. A mutual fund complex, also called an investment company, sponsors them. The term “open-end” means the company continually creates new shares of the fund to meet investor demand.
Shareholders of open-end mutual funds buy shares at net asset value (NAV), which is the market value of a fund share. NAV is calculated by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result-called total net assets-by the total number of shares outstanding.
A “closed-end” mutual fund is a type of portfolio that has a fixed number of shares and is listed on a stock exchange. Unlike open-end funds, closed-ends don’t issue and redeem shares on a continuous basis. New closed-end funds are brought to the market in an initial public offering.
Both open-end and closed-end funds are run by portfolio managers and invest in stocks, bonds or other securities. However, closed-end funds tend to be more specialized. For example, there are several single-country funds that invest in the securities of just one nation. In addition, some closed-end bond funds carry a great deal of leverage in their portfolios, meaning they’re riskier than similar open-end bond funds.
Closed-end funds are priced at a discount to their NAV because managers of such portfolios are perceived as less responsive to profit opportunities. However, open-end managers have shareholders to please.
You can find out more information on both types of funds, including top five holdings and returns, at www.morningstar.com.