Mutual funds are some of the most important and common forms of investment for small or novice investors. The concept is simple: investors pool their money and holdings under an experienced investment firm that manages the fund. You can move your money around the different holdings of the fund without a fee and can cash out your shares whenever you please. True mutual funds are open-ended; closed-ended funds are not really mutual funds at all.
Open-Ended vs. Closed-Ended Funds
A closed-ended fund is really not a mutual fund at all, but a publicly traded firm that specializes in investing in different securities. An open-ended fund is driven by the market itself, while the closed-ended fund is driven by the demand for its own shares. An open-ended fund is not limited in what or how much it can buy.
The main advantage of an open-ended fund is that it can expand itself to respond to market forces. If the economy is doing well and the fund is managing its investments skillfully, the fund itself can use its profits to expand its operation and buy more securities. This means that all investors in the fund can see their money expand and make more money as the fund managers seek out new ways to expand.
An open-ended fund is what a mutual fund truly is. It's a smart investment because you are not responsible for the sorts of investments the fund makes, yet are always involved in the fund's profits. A closed-ended fund is a single business entity that trades on the market like any other firm. An open-ended firm can expand its market holdings daily and thus can increase your own market diversity. This means, if the management firm is competent, that your investment cash is protected through the diversity of securities in which it invests. This normally includes stocks, debt and commodities like gold, oil or wheat.
A competently managed mutual fund serves its clients through investment flexibility. In an open-ended fund, this means that the expansion of security types the fund can invest in can change any any time. If gold is expected to skyrocket, for example, the fund can liquidate some of its stock and buy more gold. When interest rates rise, money can be taken from stock and sent into the money markets. Diversification of investment money means little if the “weight” of the investment money is not following expected trends. Ultimately, the advantages of open-ended funds lie in the competence of its management.
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