The different types of funds

There are two basic types of funds and they are open-end or closed-end. The open-end funds issue unlimited number of shares. Investors can buy more shares from the Mutual Fund Company and sell them back to the same company. This means the same number of shares are increased and decreased respectively.

A closed-end fund only issues a fixed number of shares and they are all sold no more are issued. In other words, closed-end funds have fixed capital structures. Investors that wish to invest in closed-end funds after the shares have been totally sold (for the first time) will have to buy shares from shareholders that are willing to sell them in the market.

Shares of closed-end funds are listed in stock markets and OTC markets  so the open-end mutual funds are being bought and sold by and for the company that is sponsoring the fund. As a result closed-end funds corresponding share prices are in function of not only their net capital value, but of the existing supply and demand in the market. Another kind of closed-end fund is the Unit Investment Trust (UIT). The UIT issues a fixed number of shares that are normally sold by the trust sponsor. Incomes coming from sales are used to buy stocks and or bonds for the trust which are kept until maturity.

Contrary to an open-end or closed-end fund there is no stock negotiation activity in the portfolio. Consequently there is no active management of the Trust which can also be translated to less management fees although this is not always the case. A Trust has a maturity date and when due rents are given back to REIT trust shareholders.

All the Units charge a sales commission while investors in open-end funds cannot choose between buying a fund that charges or not this commission.