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					        Closed-end or Open-end Mutual Funds
There are two kinds of mutual funds in this world, depending on how their shares
are traded. While most investors are familiar with the more common “open-end”
mutual funds, the less common “close-end” funds can still find a place in the
modern investor’s portfolio. Let me start by talking about the open-end mutual
fund. This is a large pool of variety of securities – stock, bonds and cash
equivalents. Investors who buy shares of the open-end fund share equally in the
rewards and losses. At the of each trading day, the price per share, or asset
value, of an open-end fund is calculated according to the value of it is stock,
bond or cash reserve holdings. When you can in your shares, the Fund Company
pays you what your shares were worth that day on the market, minus any sales
charges. A closed-end fund is similar Investors pool their money and share in the
success and failure of the fund manager’s investments. Unlike an open-end
however, a closed-end fund issues a set number of shares when the fund is
started, then issues no more. The shares of the fund are then traded on stock
exchange, much like a common stock. That has consequences for investors.
First, closed-end fund managers do not have to scramble to buy or sell securities
as money flows into and out of the fund. Because shares are bought and sold
from other investors on the exchange, closed-end fund flows and focuses on
investment fundamentals. Second, the prices of a closed-end fund are set by
what investors are willing to pay for them on the market, not just by the
underlying value of their holdings. Frequently, the shares of a closed-end fund
sell for less than their net asset value, or what they would sell for if the fund was
open-ended. Sometimes the shares of a closed-end fund sell for more. That is
the big attraction for many closed-end fund investors, who commonly scoop up
shares selling at discount, hopping to make superior profits by selling when the
share price jumps over it is net asset value. Unfortunately, that is hard to do in
practice, because nearly 80 percent of the time the shares of closed-end funds
sell at discount. The shares of some funds may never sell at premiums. In
addition, because closed-end funds are traded on stock exchange, investors
usually must pay brokerage commissions to purchase them. Those commissions
can take an additional bite out of an investor’s profits. Still, closed-end mutual
funds can be useful to investors who want to invest in specialized markets where
it is hard and expensive to buy and sell securities quickly, such as in the
troublesome foreign markets of China and Russia. Since closed-end fund
managers do not need to readjust their portfolios as fund investors buy and sell
shares, managers can cut these transaction costs to a minimum. For investors,
however, regular open-end mutual funds I think are the best choices. For a
daring investor looking for something different, closed-end funds may be worth
exploring.

				
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posted:5/15/2009
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