​

Although investment funds are among the most popular capital market products, a large group of Polish investors still cannot indicate even the basic differences between an open-end fund and a closed-end fund. Therefore, the purpose of this article is to explain how they work and how they differ from each other, these two forms of mutual investment of money.

The main difference between an open-ended investment fund (FIO) and a closed-end investment fund (FIZ) lies in the fact that in the case of the former, participation units in the fund can be bought and sold practically without limitations, while investing in FIZ is associated with certain limitations in this respect. As you can easily guess, open-ended funds, compared to closed-end funds, are directed to a wider range of potential investors, and at the same time require less knowledge of economics or finance.

Units in an open-end fund

A unit is nothing more than an evidence of an interest in an open-ended fund. The basis for its valuation is the value of assets accumulated by the fund, which changes on an ongoing basis. Importantly, the purchased units are not sold to others, as in the case of bonds or shares, but to the fund that issues them.

Open-end fund participation units are not securities and may not be traded on an exchange. However, they are subject to daily valuation and can be easily acquired by virtually anyone - the only limit may be the amount of the first and subsequent contributions to the fund. Maybe, but not necessarily, because some institutions offering the possibility of investing in funds, such as Deutsche Bank, do not require systematic contributions and at the same time do not impose high 'entry thresholds'. (only 100 PLN is enough to launch an investment).

Closed-end fund certificates

Investment certificates are units of participation in a closed-end fund. They are securities which may be offered both in public and non-public offerings, addressed to a narrow group of investors meeting the criteria set by the issuer.

Importantly, unlike open-end fund shares, in this case the number of shares issued is fixed and may change only when the next issue of certificates takes place. Such securities may be purchased either on the primary market or on the exchange, provided that they are admitted to exchange trading. Exchange-listed certificates are valued during daily trading sessions, while other certificates are valued at least quarterly, based on the value of financial instruments in the fund's portfolio.

Open-end funds and closed-end funds - portfolio compositions

Since open-end funds are required to provide for the repurchase of units at the request of participants, the assets they hold are predominantly those that can be easily converted into cash (shares, bonds, money market instruments). Closed-end investment funds can make investments with much lower liquidity - even buy premises for some land. Portfolios of such funds are usually also much less diversified than portfolios of open-end funds, and thus - carry not only the promise of higher profits, but also a greater risk of losses.

What else is worth knowing?

As indicated in the introduction, open-ended funds have the advantage that investing in them is free of any time constraints. In other words, participation units can be bought and sold practically at any time, i.e. usually every working day. Thanks to this, investors can freely implement their investment strategies and quickly react to changes in the market situation.

Many closed-end funds, on the other hand, are temporary in nature, so after a fixed period of time, usually several years, they simply cease to exist. The moments when investors can buy certificates and resell them to the fund are also clearly defined. Contrary to appearances, there are also certain limitations in this respect for exchange-listed certificates - their low liquidity, i.e. a small number of offers to buy and sell, makes it difficult to quickly start/end an investment at an attractive price.