The differences between open~end and closed~end mutual funds

An open-end mutual fund has an unlimited number of shares. You can buy these shares through either the mutual fund company or your broker. The Securities and Exchange Commission (SEC) requires that each mutual fund company calculate the NAV (net asset value) of each fund every day at the close of business.

A closed-end mutual fund is a hybrid: part mutual fund and part stock. A closed-end mutual fund is a publicly traded investment company with a limited number of shares. According to the Investment Company Institute (www.ici.org), in August 2004, the combined assets of the nation’s closedend funds were over $232 billion. As of June 30, 2004, there were 604 closed-end funds.

The total of number of June 2004 closed-end funds can generally be divided into two categories. Bond closed-end funds totaled 458, and equity closed-end funds totaled 146. Specifically, closed fund types include closed-end stock funds (investments in common and preferred stocks), closed-end bond funds (investments in a range of bonds), closed-end convertible bond funds (with portfolios of bonds that can be converted to common stocks), closed-end single country funds (specialize in stocks from one country or geographical region), and so on.

One of the things to keep in mind when you purchase a closed-end fund is that the investment company doesn’t stand ready to redeem its own shares from shareholders, and it rarely issues new shares beyond its initial offering. That’s why it’s a closed fund. You can buy or sell these shares only through a broker on the major stock exchanges. The value of these shares isn’t calculated by using the NAV methodology. Instead, shares are valued by using a method similar to bonds and are traded at either a discount or a premium. Market prices of publicly traded closed-end mutual fund shares are published daily. The Closed-End Fund Center, located at www.closed-endfunds.com, is sponsored by the national trade association of the closed-end fund industry. This Web site offers detailed investor education, a portfolio tracker, and data about specific closed-end funds.