Image source: Pexels

We are going to take a look at the differences between open-end and closed-end funds. You will want to know more about some of these important differences before you consider investing in either of these options.

Both types of funds have important purposes because they are specifically designed for different types of investors. Before we dive straight into the comparison between these two types of funds, you must understand the fundamentals of each kind of fund.

We’ll start by describing an open-end fund. These types of funds are certainly much more common than closed-end funds. You could imagine an open-end fund to be a diversified collection of shares that has no direct limit. Exchange-traded funds, also known as ETFs, are an extremely common form of an open-end fund.

On the other side of the spectrum, you have something known as a closed-end fund. This type of fund is based on a portfolio designed to raise money by creating an initial public offering. The predetermined amount of money is raised by selling an established number of shares to investors on the stock market on a specific date.

Closed-end funds have significant price fluctuations based on the supply and demand of investors. These funds are a little bit less common than open-end funds and have their own set of pros and cons.

Open-End Funds vs. Closed-End Funds

It’s understandable why some experienced investors may struggle to understand how open-end and closed-end funds work. We’ll start by discussing some of the relevant things to know about open-end funds. Open-end funds issue shares based on the demand from investors.

These funds are not restricted in terms of growth potential, and they can be based on different investment strategies. There’s usually a professional portfolio manager in charge of managing an open-end fund. It’s not unusual for open-end funds to try and save some cash in their portfolio, especially if many shareholders redeem their shares at the end of a trading day.

Investors can expect to pay significant fees when investing in an open-end fund. You’ll have the opportunity to take advantage of professionally managed portfolios that are diverse and liquid. In addition, many open-end funds are specifically designed to outperform the stock market’s growth averages annually.

Are you still uncertain if investing in an open-end mutual fund is right for you? It’s important to keep in mind that these types of open-end funds are ideal for investors that want liquid investment opportunities.

The biggest difference between an open-end fund and a closed-end fund is that the closed-end funds are actively traded on the stock market by individual investors. Like a traditional stock, a closed-end fund will raise money through an initial public offering and sell shares to investors. Price fluctuations occur in closed-end funds based on supply and demand.

Open-End Funds And 401(k) Retirement Plans

One of the reasons why open-end funds are so popular is that many employees have an eligible 401(k) retirement plan offered by their company. These types of retirement plans generally provide excellent access to open-end funds.

In open-end funds, prices are calculated at the end of the trading day. Shares are continuously offered, unlike some clos-ended funds with a limited supply that can be distributed to interested investors.

Closed-End Funds And Volatility

It’s not uncommon for closed-end funds to have increased volatility compared to other types of mutual funds. Price fluctuations may be significant in these types of funds and provide greater risks to investors.

We previously mentioned the process of an initial public offering taking place that allows investors to acquire a limited supply of shares that can actively be traded. This process can play a role in the increased volatility as well.

Conclusion | Open-End Funds vs. Closed-End Funds 

If you’re a novice investor, you might be thinking that all of these different types of funds are making your head spin around in circles. It’s understandable because all of the funds have different purposes, risk levels, and reasons for existing in the first place. They’re all designed to provide investors with opportunities for liquid investment strategies.

If you understand the basic purposes and fundamentals for open-end and closed-end funds, then you’ll be able to realize why you might want to take a chance investing in either type of fund.

No mutual fund will ever be perfect, and there will be positives and negatives for investing in each type of fund. As long as you can establish your near-term objectives as an investor, you should be able to make a well-informed decision regarding which type of fund would be best for you.