Like load vs. no load, you'll hear mutual fund people divide their universe between open-end and closed-end
funds. Here's what it means:
Open and closed-end funds are both pools of investor money and they are both managed by professionals to
maximize diversification within a set strategy. The difference is in how the fund is structured in terms of
ownership.
An open-end fund issues and redeems shares on demand, whenever investors put money into the fund or take
it out. This happens routinely every day and the total assets of the fund grow and shrink as money flows in and
out. That means the more investors buy the Vanguard 500 Index fund, for instance, the more shares there will
be. There's no limit to the number of shares the fund can issue. Nor is the value of each individual share
affected by the number outstanding, since net asset value (NAV) is determined solely by the change in prices
of the stocks or bonds the fund owns, not the size of the fund itself.
A closed-end fund is a different animal. Like a company, it issues a set number of shares in an initial public
offering and they trade on an exchange. A fund like France Growth Fund trades on the New York Stock
Exchange just like any other stock. Its share price is determined not by the total value of the assets it holds,
but by investor demand for the fund.
Investing in closed-end funds can be very confusing for the novice investor and we don't recommend it. Since
these funds are traded on the open market, most sell at a discount to their underlying asset value for a number
of reasons. Most investors who buy closed-end funds look for those with solid returns that are trading at large
discounts. They bet that the spread between the discount and the underlying asset value will close. If you don't
understand the mechanics of evaluating the discount spread, however, you're better off sticking to open-end
funds.