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Closed-ended vs. Open-ended Mutual Funds: What is the difference?
Duration of Funds
The main difference between closed-ended and open-ended mutual funds is that the closed-ended funds are for a specific duration, while the open-ended funds have no specific duration.
The investors in open-ended funds may join and leave the funds anytime they wish.
In case of closed-ended funds, the investors must stay invested for a specific duration pre-set by the fund managers.
Number of Outstanding Shares
In case of closed-ended funds, there is a fixed number of shares outstanding which are traded in the market. The markets may include the share markets or OTC (Over the Counter) markets. The price of the shares is determined by the demand and supply of the shares in the market in case of closed-ended funds. Time is a very important factor for buying closed-ended mutual funds due to the inherent volatility of prices of the shares.
Closed-ended mutual funds repurchase their shares at a bid price that may be more or less than the original price of the shares when bought by the investors. This bid price or repurchase price may have a surcharge called back-end load which is a specific feature of closed-ended funds.
Open-ended funds keep running for unlimited duration. They do not have a fixed number of shares and it depends on the share demand and supply which affects the net asset value (NAV) of the funds’ shares. In the case of open-ended funds, the investors may join or leave the funds anytime. However, it has been observed that investors want to achieve a certain amount of growth in the prices of shares before they exit the open-ended mutual funds.
The NAV of Funds
The NAV affects the share price in case of open-ended mutual funds. The NAV of a fund is the total assets minus total liabilities divided by the total number of outstanding shares.
Open-ended mutual funds must buy and sell shares at the NAV irrespective of their growth and time. Open-ended mutual funds are therefore obligated to pay the investors a value equal to the NAV when they exit the mutual funds.
In open-ended funds, the NAV keeps changing with the supply and demand of the shares in the market and it is known to everybody trading or investing the shares in the market.
Conclusion
The basic difference between open-ended and closed-ended mutual funds is their duration. While the open-ended funds have no end, the closed-ended ones do have an end in terms of trade in the share or OTC markets.
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