There are two types of Mutual Funds:
Closed-Ended Mutual Funds
- A closed-end fund is generally referred to as “Closed-Ended Company”.
- These funds sell a fixed number of shares and are launched through an IPO (Initial Public Offering).
- Once issued, they can be bought and sold at market rates in the secondary market (Stock Exchange).
- The market rate is announced daily by the stock exchange. Once close-end fund starts trading, their prices are then marked by supply and demand and not by NAV.
Open-Ended Mutual Funds
- These funds control the mutual funds marketplace in terms of volume, continually creating new units or redeeming issued units on demand.
- They don’t have a limit as to how many shares can be issued, as more investor’s purchase the funds, more shares are issued also referred to as Unit Trusts.
- The Unit holders purchase the units of the fund or may redeem them on a continuous basis at the prevalent Net Asset Value (NAV). On the other hand, an open-end fund cannot be watched the way the stocks are, because the trading is not done in open market.
- These units can be purchased and redeemed through Management Company which announces offer and redemption prices daily.