A close-end fund is an investment that is traded publicly so that a fixed amount of capital is raised only with the help of (IPO) initial public offering. This fund collected is listed, structured and then traded like stocks, like a stock exchange.
Closed end funds are quite often mistaken to be mutual funds. A very basic difference is that close-end funds are more like stocks - which means that the market is driven by demand and supply when regard to shares. While when it comes to open-end mutual fund, it doesn’t trade on an exchange but issues new shares to people who invest in it.
Since many times close-end funds are mixed with mutual funds, here is a comparison that would help you to understand this term better.
When we talk about mutual funds, it is ‘’open-ended’’ because of the free flow of cash which is always there. This means a manager known as the portfolio manager takes cash from the investor and invests, therefore giving new shares to new investors.
Now when it comes to close-end mutual funds, it means that the cash flow is not very smooth. The flow of cash in and out is closed. The portfolio manager invests a calculated amount of cash that was initially raised in public fund share. If a person wants to buy shares of the fund, they have to be bought through a stock exchange which is only through another investor. The number of funds remains fixed and doesn’t get affected by investors.
After knowing a few differences between Open-Ended Mutual Funds and Close-Ended Mutual Funds, it’s also good to know on what basis is Close-End Funds similar to Mutual Funds.
Along with knowing the comparisons and similarities, one also needs to know what makes them so different from each other.