Open-End Mutual Funds

Often referred to as "mutual funds", the vast majority of today's investment funds fall under this category. The term "open-end" is used because these funds continuously sell their own new shares or units to the investment public. As opposed to closed-end funds, the shares are always available for purchase from the fund itself, not from other shareholders. Indeed, when you choose to sell your mutual fund investment you need not look far for a buyer. The fund itself will buy back your units at their current net asset value. This characteristic is known as the right to redemption and has long been a trademark of mutual funds.

Closed-End Funds

Closed-End funds, often called trusts, issue a relatively fixed number of shares at the initial launch and are traded publicly on a stock exchange like common shares. Like mutual funds, proceeds from the initial equity sale are invested in a variety of investment vehicles (stocks, bonds, and money market instruments) in line with the funds charter. Additional share offerings are relatively infrequent and often not permitted under the funds charter. As a result, to raise subsequent capital, debt may be issued producing a leveraged effect on your initial investment, yet also increasing the risk.

The shares or units of Closed-End funds are traded on public stock exchanges. Therefore, when you buy shares (aside from the initial offering) in the fund the purchase price goes directly to the seller (another investor) of the fund's outstanding shares.