Question

I need help with this question:

Explain the differences between mutual funds and closed-end funds regarding

1. the number of shares outstanding

2. the pricing of the dund shares

Answer 1

(1)

In a closed-ended fund, all the units (shares) are issued to investors when the fund opens. After the issue of shares, the shares trade on the exchange or between investors. However, no new shares are issued, or existing shares redeemed, over the life of the fund. Redemptions and subscriptions take place through selling/buying of existing shares.

However, in an open-ended fund, new shares can be issued or existing shares redeemed during the life of the fund.  

Hence, the number of shares outstanding in a closed-ended fund are fixed through the life of the fun.

However, in an open-ended fund the number of shares outstanding can and does usually change.

(2)

Shares of closed-ended funds trade like ETFs. The shares of a closed-ended fund can trade at a premium or discount to NAV due to reasons such as distribution rate, liquidity, market volatility etc.

Prices of shares of open-ended funds are declared by the fund at the end of each day, and are usually directly related to NAV.