Section: 3 Types of Investment Companies

Sub Section: 3 Managed Investment Companies

There are two types of managed investment companies: closed-end and open-end. In both cases, the fund's board of directors, which is elected by shareholders, hires a management company to manage the portfolio for an annual fee that typically ranges from 0.2% to 1.5% of assets. In many cases, the management company is the firm that organizes the fund. For example, most banks in Saudi Arabia sponsor their local Saudi Stock Market mutual funds and are responsible for managing the portfolios. It assesses a management fee on each fund. However, for its US and other global equity funds, it hires an outside investment management company as portfolio manager. Most investment management companies have contracts to manage several mutual funds.

 

i) Open-End Mutual Funds: These are mutual funds that stand ready to redeem or issue shares at their net asset value (although both purchases and redemption may involve sales charges). When investors in open-end funds wish to "cash out" their shares, they sell them back to the fund at NAV. New shares of these funds can be purchased, or previous ones redeemed, either directly from the mutual fund's offices or from its representatives.

 

ii) Close-End Mutual Fund: In contrast to open-end mutual funds, close-end funds do not redeem shares or issue new ones and investors must sell their shares to other investors if they wish to cash out. At the time of its launch, a close-end fund invites capital from investors. After a certain date, the window is closed and from then onwards, no redemption or issuance of new shares takes place. Shares of closed-end funds are traded on organized stock exchanges and can be purchased through brokers just like other common stock; their prices therefore can differ from NAV.

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