CLOSED-END MUTUAL FUNDS

Closed-end mutual funds are somewhat similar to corporations because they issue fixed numbers of shares. This doesn’t fluctuate, with the exception of when a new stock may be issued. The funds may issue bonds or preferred stock to support the common shareholders’ positions. They then use their capital and other resources to invest in other companies’ securities. Closed-end funds are not nearly as common as open-end funds.

Closed-end funds’ shares are bought and sold at market like other mutual fund shares and shares of stock. Their prices are dependent upon the supply and demand of the market; they’re not tied to the net asset value (NAV) per share of the funds. Therefore, when the market price for a closed-end fund’s shares is greater than the NAV, the fund is trading at a premium. Likewise, when the fund’s shares are trading below the NAV, they are trading at a discount.

OPEN-END FUNDS

Open-end funds are the most common mutual funds. Unlike closedend funds, they don’t limit the amount of shares. Rather, the number of available shares is constantly changing due to new investors purchasing shares and existing investors redeeming shares. When investors wish to purchase mutual fund shares, they are buying them from the company itself. This means that when investors want to redeem their shares, the company must be ready to buy them back from the individual.

Open-end funds’ share prices are derived from the most recent NAV of the shares. Net asset value per share is the total value of all the securities and other assets held by the fund, minus any of the fund’s liabilities. This resulting number is then divided by the number of outstanding shares in the mutual fund. The NAV is calculated daily, at the close of the business day. Unlike common stocks, which investors may purchase at any time during the business day, and sometimes later due to extended-hours trading, open-end mutual funds are traded at the end of the day due to the pricing structure of the NAV.

So, which are better: closed-end or open-end funds? The answer is neither. Both have their advantages and disadvantages. Open-end funds are bought and sold by the mutual fund company, whereas closed-end funds are traded on stock exchanges. Therefore, if you want to purchase shares of a closed-end fund, you will need to find an investor who wants to sell his, just as you would with stocks. However, you may be able to purchase shares of a closed-end fund at a discount. Open-end shares are always bought and sold at NAV. Of course, you may also wind up paying a premium price for your closed-end shares. In the end, it matters more what the funds invest in, what their track record is, and what your investment goals and objectives are, rather than whether the fund is open- or closed-end.

Net asset value—The true value of a share of a mutual fund. It is calculated by taking the total value of all assets and other securities of the fund, less any of the fund’s liabilities, and dividing that number by the number of the fund’s outstanding shares. NAV is valued on a daily basis.

Breakpoint—The dollar amount at which the investor is entitled to a lesser sales charge.

Rights of accumulation—Amount of money already invested in a mutual fund that has a front-end sales load. The sales charge is discounted based upon previous mutual fund purchases within the same fund or fund family.

12-b-1 fees—An annual sales charge taken from mutual funds for sales and marketing costs.