Mutual funds and ETFs
Closed-End Mutual Funds Comparing closed-end and open-ended mutual funds
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- In the last video we had Pete starting an open-ended mutual fund
- that was managed by Pete Inc.
- Mutual Funds normally have nice grand names
- maybe they called this the Saturn Fund
- and if there is a Saturn Fund out there, I just picked that name at random
- I'm not implying that this is you or anything like that
- I just made up that name on the fly
- But it's managed by Pete Inc. and we called it an open-ended fund
- because at any time one of the people who owned a share
- or unit in the fund can redeem it back from the fund
- that Pete or the management company would say
- If you want your $180 back we'll buy that
- we'll give you $180, you give back the share, and then we cancel the share
- and if anyone wants to add to the fund
- if they want to invest
- the corporation can create new shares
- and then issue it to people - sell it to people
- and their money would go into the common pool
- and the management company would take fees off of it
- But that probably had you asking
- If this is an open-ended fund, what is a closed-ended fund
- or do they even exist?
- And they do
- That's what I'm going to talk about here
- Closed-end funds
- and closed-end funds on some level are a little bit simpler
- What happens in a closed-end fund is that
- all of the investors are essentially
- Or I guess you can say that the share structure
- is locked from the beginning
- So if Pete wanted to start a closed-end mutual fund
- he would once again register a corporation with the SEC
- he would market it it
- he would tell everyone "Hey I'm Pete, I'm an awesome investor"
- "Here's my track record"
- and then he would just get a bunch of investors
- so lets say he's able to find 20 investors
- and that's all he's able to find
- so this is 20 right here, and I'm not going to count
- but, let's say that there's 20 slices right over here
- He gets 20 people, so let's say they each give $100
- so he is able to raise $2000. 20 times $100
- So he is able to raise $2000
- And once that happens, the fund is closed.
- Pete's going to do his best to manage this
- So Pete will manage this and he will still take a management fee
- Maybe the same 1%
- But what's fundamentally different here
- and he can market - well he doesn't have to market the fund anymore
- because he can no longer get new investors
- and this is actually the main difference
- An open-ended mutual fund
- at any point in time
- or I should say at the end of trading
- at the end of a day, they can lose investors, or they can gain investors
- so it's an incentive for an open-ended fund
- to constantly market itself
- because the manager wants to manage more money
- so that he gets more of a management fee
- And a closed-end fund
- They'll market it right when they are creating the fund
- But once they create it
- So lets say he just got his 20 investors
- Then it is closed
- He can't create any more shares
- or cancel any more shares
- But what can happen
- so you might say
- well in a closed-end fund
- How do these people let's say you're holding
- one of these shares
- let's say that you're holding one share
- right over here
- what happens if you want to
- If you need to buy a house, or if you owe money to somebody
- so you want to get the value of your share back
- and the answer with a closed-end fund
- is that you would then go sell your share to someone else
- so this right here you can trade it
- You can trade it
- and you would trade it just you would
- trade the stock of any company
- And in fact when you go and buy or sell
- a stock of IBM, most of the time
- you're just buying or selling it from someone else
- You're not transacting with IBM
- the company
- You're trading in the secondary market
- you're not dealing with the actual corporation
- so that's where the investor
- get's their liquidity
- and when we say liquidity
- it allows them to convert it into cash
- because they can trade it
- So the big difference
- open-ended fund: when an investor wants their money back
- they have to deal with the fund itself
- the fund will buy back their share
- If some wants to invest in a fund
- the fund will sell them the share
- so they're always dealing with the fund itself
- in a closed-end fund
- once the fund is created it's share pool is fixed
- and if someone wants to buy or sell a share
- it happens in the secondary market
- so they're buying and selling from each other
- they're not dealing with the actual fund manager
- The disadvantage from the fund manager here
- is it's much less flexible
- in terms of growing or shrinking the fund
- The advantage is this fund manager
- doesn't have to keep cash around
- in case the share holders want to redeem
- In the open-ended fund we saw that the manager
- has to keep some cash around in case one of these
- investors wants their money back
- here - the closed-end fund - he knows that no one
- can get their money back right here
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