Question

Discuss the difference in their structures that explain these differences between a closed-end fund and an open-ended mutual fund:

a) When investors buy shares of the open-end mutual fund (in the aggregate), the number of fund shares increase. But, this is not the case with a closed-end fund. Why?

b) An open-end mutual fund keeps a larger % cash (or cash-equivalent) allocation in the portfolio than the closed-end fund does. Why?

Answer 1

Closed-end fund and an open-ended mutual funds are professionally managed funds that is diversified by investing in a variety of equities or other financial assets, rather than in a single stock. And both pool together the resources of various investors to be able to invest in a larger and wider scale. But, there are significant differences in the structure, pricing, and sales of closed-end funds and open-end funds. A closed-end fund has a fixed number of shares offered by an investment company through an initial public offering and 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. A closed-end fund is created when an investment company raises money through an IPO and then trades its shares on the public market like a stock. It normally offer higher returns or better income streams than their open-end fund counterparts. The price of a closed-end fund fluctuates according to supply and demand, as well as the changing values of its portfolio's holdings.It fcilitate Diversified portfolio, Professional management,Transparent pricing and Higher yields than open-end funds, but it has the certain limitations like Subject to volatility, Less liquid than open-end funds, Available only through brokers, May get heavily discounted.

An open-end fund is an investment vehicle that uses pooled assets, which allows for ongoing new contributions and withdrawals from investors of the pool, As a result, open-ended funds have a theoretically unlimited number of potential shares outstanding. Some mutual funds and exchange-traded funds are both types of open-end funds. Open-end shares do not trade on exchanges and are priced at their portfolio's net asset value (NAV) at the end of each day. It Hold diversified portfolios, lessening risk, Offer professional money management, highly liquid and Require low investment minimums. But they Are priced just once a day, Must maintain high cash reserves, Charge high fees and expenses (if actively managed) and Post lower yields (than closed-end funds).

Note : answer for a and b questions are already explained above.

a) A closed-end fund has a fixed number of shares offered by an investment company through an initial public offering. 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.

b) An open-end mutual fund Open to new investors due to continuous issuance of shares. Shares are purchased directly from the fund's underwriter and Net Asset Value (NAV) is published daily.