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. Last Updated: 07/27/2016

Open-End and Closed-End Funds as Investment Vehicles

Corporate financing is always a top question for business development, and there are many different ways to get money externally without using the internal financial resources of a company. Open-end and closed-end funds are two types of mutual funds that could be used.

A closed-end fund is a collective investment scheme whereby an investment company sells shares like any other corporation but usually does not redeem there. Shares are sold on stock exchanges from a broker or market maker.

An open-end fund is an investment company that continually creates new shares on demand.

Mutual fund shareholders buy the funds at net asset value and may redeem them at any time at prevailing market prices.

Before you can plan a mutual fund strategy, you need to have a clear picture of your goals as an investor. You also need to determine a time frame for reaching these goals. Investing is time-sensitive, so you will always need to take time into account.

The simplicities and other attributes of mutual investment funds provide great benefits to investors with limited knowledge, time or money. First, mutual funds efficiently manage risks through diversification, which involves the mixing of investments within a portfolio. You don't need the large amounts of cash needed to create individual portfolios.

Second, mutual funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges.

Third, mutual funds allow you to get in and out with relative ease. You can sell mutual funds at any time as they are as liquid as regular stocks.

Both the liquidity and smaller denominations of mutual funds give investors the ability to make periodic investments through monthly purchase plans while taking advantage of dollar-cost averaging.

However, like most investments, there are also disadvantages. The first thing to consider is fluctuating returns. There is no guaranteed return and always the possibility that the value of your mutual fund will depreciate. Second, although diversification is one of the keys to successful investing, many mutual fund investors tend to overdiversify.

So which do you chose, open-end or closed-end?

Open-end funds in effect add to the net assets of a company, while with closed-end funds you will undoubtedly take a hit if you buy a stock fund when it is first offered for sale.

Because the fund's shares are offered at their actual value, they start trading at a discount almost immediately. Closed-end funds don't really retreat that much during a downturn in the market, but they are preferable for the long-term investor. Also, if you're the type of investor who buys and sells shares rapidly, then you would lose a lot of money in the commissions of closed-end funds.

Another pro for considering mutual funds as a way of investment is the taxation of income deriving from this kind of fund.

There are two polices of tax treatment that are usually used. The first implies that every investor pays taxes on his own and the fund doesn't bear any obligations to withhold. The second treats a fund as a source of income and therefore binds the fund to act as a tax-agent, withholding tax from individuals as well as artificial persons (no matter national or foreign).

Russian tax legislation states that the management company of the fund is liable for tax withholding. Therefore any investor of a Russian closed-end or open-end fund is obliged to pay taxes in Russia.

Another tax policy is used in some European countries. Every investor is obliged to pay taxes independently and the fund is not under any obligations to withhold. This way is far more inviting for investors because it allows them to choose where and how to pay taxes on their own.