Open-end funds and closed-end funds are a serious source of confusion for many students. If you’re about to take the SIE Exam or the Series 7 Top-Off Exam, then this post, and our video course (snippet in the short video above), may help.
In this section, you should be able to answer a few basic questions. For example, what is the difference between open-end funds and closed-end funds? What are some easy ways to remember these differences?
Let’s dive in.
First let’s clarify some jargon. When you hear a discussion on “mutual funds” in the text, the default assumption is that they are discussing “open-end funds.” Closed-end funds will be specifically referred to as “closed-end funds.” (Key point: mutual funds = open-end funds!)
Next, the easiest way to remember the difference between these two management investment company products is by their name.
Open-End Funds and Closed-End Funds: What’s the Difference?
An “Open-End Fund” is so named because their offering is continuous. In other words, imagine that they always have their door “open.” When an investor would like to purchase a mutual fund, the investment company issues new shares. After some time passes, should that same investor decide that they no longer want those shares then the open-end fund will “redeem” the shares from the investor. In basic terms, when a mutual fund company “redeems” shares of its open-end fund from the investor, it’s almost always because that same investor wants to sell his/her shares.
It’s a nice way (and jargon-filled way) of saying an investor sells their mutual fund shares back to the investment company.
At this point, you might have gathered that the share count of an open-end fund is constantly expanding and contracting.
When it comes to a closed-end fund, again let’s use the name to describe how it works.
Think of the “Closed-End Fund” name in reference to a closed door. Specifically, when an investment company issues closed-end fund shares, they IPO through a metaphorical “open door” which is then “closed” after the shares are issued. The shares are “dumped” onto an exchange. Anyone that would like to purchase a share would have to buy only from the shares that were originally issued. Thus, they have to find another investor on the exchange that is willing to sell. These shares can only be traded in the secondary market. This is in contrast to open-end fund shares which come directly from the investment company.
Key Characteristics Between the Two
Aside from remembering their differences by name, these two funds differ in other key areas. Below we outline a few differences (and similarities) between open-end funds and closed-end funds. If you can remember these, then you’re more than halfway home on this topic. As a SIE Exam tutor, we know that students just need a basic understanding. The Series 7 Top-Off difficulty level is a little higher so there is more on this topic that you’ll need to remember for that exam. However, the table below is a good place to start!
| Open-End Funds | Closed-End Funds |
| Diversified portfolio | Diversified portfolio |
| Trades once a day | Trades throughout the day (on an exchange like the NYSE) |
| Purchased by investor from issuer | Purchased by investor from another investor |
| NAV + Sales Charge | NAV + commission |
| Requires a prospectus | No prospectus required for resale |
| Can NOT be purchased on margin | CAN be purchased on margin |
Source: Professional Exam Tutoring, LLC, STC, Kaplan
Overall, the above is a quick summary of the open-end and closed-end fund differences. If you’d like to hear more, at Professional Exam Tutoring we tutor thousands of hours each year, and this topic is a big one. We recently launched a video lesson on the subject too. Click on book a tutor for more details. Good luck studying in the meantime!