Closed Ended or Open Ended Investments: What's the Difference?

The primary differences between closed-end funds and open-end funds lie in how they are organized and how they are bought and sold by investors. There can also be some significant differences in the investments that make up the funds' portfolios.

Open-end and closed-end investments do have several basic characteristics in common. Both are professionally managed funds that achieve diversification by investing in a collection of equities or other financial assets, rather than in a single stock. Both pool the resources of many investors to be able to invest in a larger and wider scale.

A closed-end fund has a fixed number of shares offered by an investment company through an initial public offering (IPO). Thereafter, closed-end fund shares are traded on an exchange, just like an individual stock. Investors acquire fund shares by purchasing them on the exchange through a brokerage account. The price of shares in a closed-end fund is more reflective of the market than the net asset value of the fund itself.

Closed-end funds can be traded at any time of the day when the market is open, while open-end funds are traded at times of day dictated by the fund managers. They can’t take on new capital once they have begun operating, but they may own unlisted securities in the U.S.

The nature of each type of fund also affects how it is priced. Open-end fund prices are fixed once a day at their net asset value. That net-asset value settlement price is the only price at which fund shares can be purchased that day. Closed-end funds trade throughout the day like individual stocks and can be bought or sold at whatever price the fund is trading at. Since market demand determines the price level for closed-end funds, fund shares typically sell either at a premium or a discount to net asset value.

Another difference is that a closed-end fund is more likely than an open-end fund to include alternative investments in its portfolios such as futures, derivatives or foreign currency.

However, there are significant differences in the structure, pricing, and sales of closed-end funds and open-end funds. Open-end funds (which most of us think of when we think mutual funds) are offered through a fund company that sells shares directly to investors. Examples of open-end funds include mutual funds in the U.S., SICAVs in Europe, and OEICs or unit funds in the UK.

The number of shares in an open-end fund is not fixed and is theoretically unlimited. The fund sells as many shares as investors wish to buy. Share price is based on the fund’s net asset value and reflects the fund’s performance.

Some such funds may charge investors a fee on either the purchase of shares (known as a front-end load in the U.S. and an initial charge in the UK) or on the sale of the shares (known as a closed-end load). Still, other open-end funds will not charge investors a fee at all; these are known as no-load funds.