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What is the difference between an open-end and a closed-end mutual fund?

Both open-end and closed-end mutual funds comprise a portfolio of securities (such as stocks and bonds) that is managed by a professional money manager. If you wish to invest in the fund, you buy shares. Basically, however, that is where the similarities end.

A key difference between the two types of funds is that the number of outstanding shares of an open-end fund can vary dramatically from day to day, whereas shares of a closed-end fund are fixed in number. An open-end fund will issue new shares, or repurchase old shares, as needed to meet investor demand, depending on whether money is being added to the fund or shares are being redeemed. The per share price is determined by the net value of all assets held by the fund, divided by the number of shares.

As mentioned, a closed-end fund has a fixed number of shares. You don't purchase new shares from the fund; instead, you purchase existing shares from other investors. Shares are typically traded on an open market (stock exchange) where they sell at either a premium or a discount, depending on demand.

Open-end funds are by far the most popular among typical investors. With an open-end fund, you can participate in the markets and have a great deal of flexibility regarding how and when you purchase shares. Also, you are never required to purchase shares at a premium. Closed-end funds are typically more volatile and behave more like individual stocks. You need to buy them through a broker, and if you want out (or in), you are bound by whatever price the market bears.

Note: Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.