Another choice you have when you invest in
mutual funds is between open-end, closed-end, and exchange traded
funds. Most
mutual funds are open-end funds,
which means the fund sells and redeems its shares.
As more shares are sold, the fund grows. Sometimes open-end funds
are closed to new investors when the funds become too large to
be managed effectively — though current shareholders can
continue to invest money. When a fund is closed this way, the
investment company offering the fund often creates a similar fund
to capitalize on investor interest.
Closed-end
funds are traded on the major exchanges, as stocks are.
There are a fixed number of shares available because a closed-end
fund raises its money all at once and does not buy back shares
investors want to sell.
Closed-end fund shares often trade at a discount,
or less than their net asset value, but you may pay a premium,
or more than the NAV, if the fund is in demand. Most funds that
invest in a single country — such as a Mexico fund —
are closed-end funds.
Like closed-end funds, shares in exchange traded funds are bought and sold through a brokerage account
and traded among investors on
stock exchanges rather than redeemed through the fund. Their prices
change constantly throughout the trading day, unlike open-end
funds whose prices are set only once, at the end of the day. Unlike
closed-end funds, exchange-traded fund prices rarely vary much
from the fund’s NAV.
How big is too big?
As funds become extremely large, they can be difficult to manage effectively. Very large funds may not be able to purchase enough shares of a particular stock, which means that they may have to hold a lot of assets in cash. Plus, if a fund purchases an extremely large number of stocks, it can have a noticeable impact not only on the price of the stock it's purchasing, but on the overall market.
