Investment Companies—Open End vs. Closed End - Henssler Financial (2024)

In the world of investing, mutual funds are not the only type of investment company; however, they are most popular. The Investment Company Act of 1940 created three types of investment companies: Face Amount Certificate Companies, Unit Investment Trusts and Management Companies.

A management company is an investment company that manages a portfolio of securities for its shareholders. Mutual funds fall into this category. Management companies are divided into two categories: open-end or closed-end. The main difference between the two is that an open-end company makes a continuous offering of its shares, while a closed-end company makes a one-time offering of its shares.

Open-End Investment Companies
An open-end investment company makes a continuous offering of its shares that are redeemable. An open-end investment company is the technical term for a mutual fund. The purchase price of a fund is the net asset value, plus any commission or sales charged.

Closed-End Investment Companies
A closed-end company makes a one-time offering of its shares that are not redeemable. It issues shares of common stock, from which capital will be raised, and builds a portfolio of securities. The purchase price is determined by supply and demand; therefore, a closed-end fund shares can sell at a discount from net asset value or at a premium over net asset value.

Below is a chart comparing the characteristics of open-end companies and closed-end companies:

Today there are more than 27,000 mutual funds (open-end) as compared to approximately 624 closed-end companies. The popularity of mutual funds is evident: An investor can find mutual fund prices printed in various media sources everyday, while closed-end company quotations are printed only once a week.

In conclusion, the main difference between the two categories is the method by which they obtain capital to invest. An open-end company makes a continuous offering of its shares, while a closed-end company makes a one-time offering of its shares. However, the goal is the same, both invest professionally managed money for the benefit of shareholders. Henssler Financial generally recommends avoiding closed-end funds, since the net asset value may not be the price the security sells for; therefore, adding to the risk of owning it. While specific situations may warrant considering closed-end funds, generally, we believe it is better for investors to use open-end funds, commonly known as mutual funds. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.