Open-Ended versus Closed-Ended Investment Funds

Investment funds are pooled investment vehicles that invest in a collection of assets, however these can be structured in different ways. Two such different structures are what are referred to as open-ended and closed-ended.

The difference between open and closed-ended funds comes down to how shares in the fund are purchased and sold.

Open-ended funds create new shares whenever new investment is received. They generally trade on a daily basis, though some may trade weekly or monthly. For daily traded funds, their price is calculated daily and reflects the net asset value (“NAV”) of the fund on that day. Shares will be bought and sold at that price until a new price is set.

In comparison, closed-ended funds have a fixed number of shares. These are initially sold by way of an initial public offering (“IPO”), after which they are sold on a stock exchange. The price of shares traded on an exchange is based on the price that investors are willing to buy and sell them for, similar to a stock, with supply and demand, and market sentiment, driving the price upwards or downwards. The fund will still produce and communicate the net asset value of the fund, which represents the actual value of the underlying assets, however this can be above or below the price at which shares are trading. Where shares are trading above the NAV they are considered as trading at a premium, whereas if they are trading below the NAV then they are available at a discount.

An open-ended fund may offer a lower level of risk overall as the price of shares represents the capital growth and income generated on the portfolio of assets, whereas with a closed-ended fund the market price of shares can deviate considerably from the value of the underlying assets. Closed-ended funds do also have the potential to generate better returns, however.

Past performance may not be repeated and should not be used as a guide to future performance.