When you begin looking at investing, mutual funds will probably go to the top of your list. They are professionally managed, diversified, liquid and a great way to accumulate wealth. You will also notice that there are open-ended and closed end funds that you can purchase. What is the difference and which is better for you?
In order to properly compare these two investments, you need to understand the similarities as well as the differences. After you make your comparison, one should stand out as distinctly better for your investment portfolio and your trading strategy.
Open Ended Funds: Mutual funds are classified as open-ended because they will continue to issue new shares on the fly as additional dollars are added to the fund. Open fund managers can continue to add new capital to their investment portfolio as it comes in, but also must redeem securities if liquidity demands require it.
Advantages: Open ended funds offer diversification, daily liquidity, professional management, service and convenience to all investors. They are also very easy to compare with other investments because of their standardization of return and risk calculations along with their government oversight and regulation.
Disadvantages: Some of the concern with mutual funds are their various fee and commission structures along with less control over the timing and recognition of capital gains which can affect their income tax efficiency. They are also only priced and valued once each day at the end of trading, which provides less market timing and trading flexibility.
Closed Ended Funds: Closed-ended funds are unique in that after they begin operating, they are closed to new capital. They do not issue new shares, nor do they redeem securities when someone buys or sells their shares. They continue to trade only with the capital that they originally raised.
Advantages: Closed funds don't have to deal with the added expense of continually creating or redeeming new shares, which allows them to keep less cash in their portfolio. They also don't need to worry about market fluctuations because they won't need to sell anything if someone wants to redeem shares. Closed shares are traded all day long just like a stock, which allows for greater timing and trading flexibility.
Disadvantages: In order to purchase or sell closed funds, you must pay a commission on each trade, similar to stock trades. As for liquidity concerns, you need both a buyer and willing seller to execute a transaction. If market conditions are extremely volatile, their may not be any buyers or available sellers. Closed funds also sell at premium or a discount depending on market conditions and investor perceptions. This could be create an opportunity or a dilemma depending on which side of the trade you are on.
Summary: As with any investment vehicle, there are risks associated with them. For the majority of investors, open-ended funds will provide an easier, more effective way to systematically accumulate wealth. If you use no-load mutual funds, you can buy and sell regularly without commissions or transaction fees and use systematic investment programs to continually add to your positions.
But if you are familiar with buying a closed portfolio and are comfortable with transaction fees, premiums and discounts, there are some great closed end funds available. For a knowledgeable investor, increased profits can be made with a sound trading strategy and a good gut instinct.
To discover additional investment, financial and income tax strategies, check out my blog or download your FREE Wealth Expansion Kit by clicking here. The first step to creating wealth is knowing where you are and then charting a path that will enhance your financial strengths and correct your weaknesses.
About the Author:
Keith Maderer is a financial expert and has been a investment and tax adviser in the Western New York area for over 30 years. He is the owner of SENIOR Financial and Tax Associates and the founder of the Maderer Foundation, a private scholarship program.
Keith is also the author of "How To Get Your College Education For Less". Available on Amazon.com - ISBN No: 978-1-4538-2053-7.
You can get your FREE Wealth Expansion Kit, or check out his blog by visiting http://www.sftaweb.com/
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