Technical Savings and Investments Information

Open-end and Closed-end Funds

Investment funds sell shares to investors and use the proceeds to purchase assets and securities according to the investment objective of the funds. However, funds differ in the way they operate after the funds have been launched and can be classified as open-end or closed-end.

(a) Open-end Funds
An open-end fund has a variable capitalization. It stands ready to purchase existing shares at a price based on or near the NAV of the underlying investments. On the other hand, it may continuously offer new shares to investors, again at a price based on the NAV. The open-ended nature means that the fund gets bigger and more shares are created as more people invest in it. The fund shrinks and shares are cancelled as people withdraw their investment. The price of the shares is based on the value of the investments the fund has invested in.

(b) Closed-end Funds
A closed-end fund is an investment company whose line of business is investing in other financial assets or companies. It issues a set number of shares initially to capitalize the fund, i.e. the fund size is fixed. After the initial launch, new shares are rarely issued or repurchased and the number of shares does not change regardless of the number of investors. 

An investor who wants to buy or sell shares in the closed-end fund has to do it through the secondary market. These funds are commonly traded on organized exchanges such as the New York Stock Exchange, the American Stock Exchange or the Hong Kong Stock Exchange.

Although the price of the shares of a closed-end fund reflects the value of the investments in the fund, it does not equal to the NAV of the fund as in the case of open-end funds. If there are more people willing to sell their shares than people willing to buy, the share price tends to fall and may be lower than the NAV. If there are more buyers than sellers, the share price tends to rise and may be higher than the NAV. Studies in the US indicated that closed-end funds (in the US) usually traded at a discount to the NAV between 5 to 20%.

Closed-end funds are generally established to invest in markets where the assets are less liquid, eg the stock markets of emerging economies or property. This is due to the closed-ended nature of the fund which protects the underlying assets from having to be sold (at unreasonable price) to meet the redemption requirement of the investors during extreme market condition.