Investment funds are a popular method of individual investing, for the reason that they offer the small investor a way to sidestep his or her low-capital status, and take advantage of the power of a large fund. An investment fund is a large company that pools the resources of many individual investors, giving them access to many more and different stocks, bonds, and other securities than they would otherwise have been able to invest in. The three types of investment funds are the open-end mutual funds, unit investment trusts, and closed-end funds. Each of these types of funds has advantages for investors with different objectives.
Mutual funds are one type of open-end fund, open-end meaning that even after the fund is launched, investors can still pool their money in the fund, and new shares can be created as time goes on to allow these investors a share in the fund. These funds, which can invest in most types of securities, have an advantage over closed-end funds in that their value is exactly equal to their NAV (net asset value): this means that an investor will get shares in the fund worth exactly the amount he invests. Closed-end funds do not have this guarantee.
On the other hand, an open-end fund can become associated with higher costs of maintenance, since creating new shares is not free; also, it is much less stable and more susceptible to the effects of a market panic. This is due to the fact that investors in a mutual fund are free to sell as they see fit, and if too many do so, the manager of the fund is left making necessarily poor selling decisions to raise money, thus diminishing the value of the fund. A unit investment trust is also an open-end fund, but it differs from a mutual fund in that the fund runs for a specified amount of time and has a fixed portfolio, meaning that the manager cannot buy or sell securities different from those the fund began with.
Closed-end funds are another popular type of investment fund. Unlike open-end funds, they launch with a specific number of shares that cannot be increased or decreased during the fund's run. If a shareholder in a closed-end fund wishes to sell, he or she does not sell directly back to the fund, but instead must sell to another individual buyer. Its shares usually sell at a premium (higher than market price) or at a discount (lower than market price), since the NAV fluctuates more easily. Closed-end funds have other advantages, too: they can be traded at any time of the day instead of only at the closing market price, and closed-ended fund managers may own unlisted securities. While closed-ended funds are more susceptible to market crashes, their stability lies in the fact that they are much more likely to bounce back in the aftermath, thus rewarding those who keep their shares in a crisis.
The three types of investment funds, open-end, UITs, and closed-end funds, all offer their unique features that are not necessarily better or worse for the small-time investor. Each investor must choose which structure he or she feels most comfortable with, and invest there.
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