Mutual funds are all the rage at the moment and even many conservative investors have begun investing in Mutual Funds systematic investment plans. There is however, perpetual confusion overwhat do open-end funds, closed-end funds and exchange-traded funds mean? Open-ended funds are available in most developed countries, though terminology and operating rules vary. U.S. mutual funds, UK unit trusts and OEICs, European SICAVs, and hedge funds are all examples of open-ended funds.
While they are all essentially mutual funds, each of these fund types are structured differently. Open-end mutual fund shares are bought and sold at their net asset value, also known as NAV and this is determined by several factors, one of which is linked to the value of the fund's underlying securities. It is generally calculated at the close of every trading day.
Majority of open-ended funds are actively managed, which means that a portfolio manager decided what to buy & sell, whereas ETFs or index funds are now growing in popularity. Open ended mutual funds offer retail investors an easy and low-cost way to pool their money to purchase a diversified portfolio that reflects a particular investment objective. In contrast, closed-end funds typically have a fixed number of shares that are traded among investors on an exchange.
Similar to stocks, their share prices are determined according to supply and demand. Exchange-traded funds or ETFs also trade like stocks on an exchange. Index funds are open-end funds that attempt to replicate an index, such as the S&P 500, and therefore do not allow the manager to actively choose securities to buy.
You also don't need a large corpus to invest in open ended Mutual Funds. However, this does not meant that open-end funds are always the best option and other fund types are inferior in terms of returns. Many experts are divided on whether or not the structure of a closed-end fund works better than an open ended fund.
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