Three wrappers around a portfolio. Where you buy and sell — the fund or the market — is the whole difference.
Same portfolio, three different doors
An open-end fund, which most people call a mutual fund, issues new shares whenever someone invests and cancels them whenever someone leaves. There is no fixed number of shares. The investor deals with the fund itself, not with another investor, and the price is the net asset value computed at the end of the trading day. That is forward pricing: an order placed at eleven in the morning is filled at the value struck after the close.
Keep reading: 4 more paragraphs (about 2 min)
A closed-end fund raises a fixed pool of money once, in a public offering, and then lists its shares on an exchange. After that the fund neither issues nor redeems in the ordinary course. An investor who wants out sells to another investor at whatever the market will pay, which may be above or below net asset value. Those premiums and discounts are normal and are set by supply and demand, not by the portfolio alone.
A unit investment trust is the third wrapper and the one candidates forget. It buys a fixed portfolio, holds it, and has a stated termination date. There is no investment adviser making decisions, because there are no decisions to make after the portfolio is assembled. Holders own redeemable units and can present them back to the trust, so a UIT redeems like an open-end fund while being unmanaged like a portfolio in a box.
Reduce a question to two tests. Where does the investor sell — back to the issuer or to another investor in the market? And is anyone managing the portfolio? Open-end redeems and is managed; closed-end trades and is managed; a UIT redeems and is not managed. Nothing else about the three structures matters as much as those two answers.
The statute sorts these three by a test worth knowing in its own words. The Investment Company Act divides investment companies into face-amount certificate companies, unit investment trusts and management companies, and then splits management companies in two: an open-end company is one offering for sale or with any redeemable security outstanding of which it is the issuer, and a closed-end company is any management company that is not open-end. Redeemability, not listing, is the dividing line. The unit investment trust has its own three-part definition — organized under a trust indenture or similar instrument, having no board of directors, and issuing only redeemable securities — and the middle limb is the one that explains everything else about it. With no board there is nobody to change the portfolio, which is why a unit investment trust is unmanaged and why it has a termination date rather than a strategy.
Exam terms (7)
- Mutual fund
- The everyday name for an open-end fund, which issues and redeems its own shares at net asset value.
- Open-end fund
- Issues and redeems its own shares continuously at net asset value.
- Net asset value
- Assets minus liabilities divided by shares outstanding, computed each trading day.
- Forward pricing
- An order is filled at the next net asset value computed after it is received.
- Closed-end fund
- A fixed number of listed shares that trade between investors at market price.
- Premium or discount
- A closed-end market price above or below the value of the portfolio behind it.
- Unit investment trust
- A fixed, unmanaged portfolio of redeemable units with a termination date.
Three wrappers compared
| Mutual fund (open-end) | Closed-end fund | Unit investment trust | |
|---|---|---|---|
| Shares outstanding | Changes daily | Fixed after the offering | Fixed units |
| Investor sells to | The fund | Another investor | The trust |
| Price received | Net asset value | Market price | Approximately NAV on redemption |
| Portfolio managed | Yes | Yes | No |
| Where it trades | Not listed | On an exchange | Redeemed by the trust; sponsor may keep a secondary market |
Try it: Cover the table and answer two questions for each of the three wrappers, out loud: where does a departing investor get the money from, and is anyone choosing what the portfolio holds. Then name the one wrapper whose price can differ from the value of what it owns, and say why the other two cannot drift like that.
Check yourself
Try a question, then read the explanation to review the rule.
Opening your study record…
Worked example
Two investors hold portfolios worth $22 a share. One holds an open-end fund, the other a closed-end fund trading at $20. Both decide to sell on the same afternoon.
- The open-end holder sends a redemption order at two in the afternoon. It is not filled at any price quoted during the day; it is filled at the net asset value computed after the close, which is forward pricing.
- Suppose that closing net asset value is $22. The fund pays $22 a share, less any redemption fee the fund charges, and cancels the shares.
- The closed-end holder has no such right. The fund will not take the shares back, so the sale goes to another investor through the exchange.
- The portfolio behind those shares is worth $22, but buyers are only paying $20, a discount of $2 a share. The seller receives $20 whatever the portfolio is worth.
- Nothing has gone wrong with the closed-end fund. A discount is a normal feature of a structure whose price is set by demand for the shares rather than by the value of the holdings.
Same rule, new context
Opening your study record…
The closest contrast
Open-end: back to the fund.
Closed-end: to the market.
The distinction decides every question about the price an investor receives. Redeeming with the fund produces net asset value by definition; selling into a market produces whatever a buyer will pay, which is why only closed-end shares carry a premium or a discount.
Summary
- Open-end funds create and redeem shares continuously; they redeem at net asset value, and buyers pay net asset value plus any sales charge.
- Forward pricing means an order is filled at the next value computed after it arrives, never at an earlier one.
- Closed-end shares trade between investors on an exchange and may sit at a premium or a discount.
- A unit investment trust is unmanaged, holds a fixed portfolio, has a termination date and redeems its units.
Related practice
- Open-end vs closed-end vs UITPractice this
Sources
- SIE Examination Content Outline (2025) · FINRA · checked 2026-10-12
- 15 U.S.C. § 80a‑4 — Classification of investment companies (Investment Company Act section 4) · US Code · checked 2026-09-04
- 15 U.S.C. § 80a‑5 — Subclassification of management companies (Investment Company Act section 5) · US Code · checked 2026-09-04
- 17 CFR 270.22c‑1 — Pricing of redeemable securities for distribution, redemption and repurchase · SEC · checked 2026-09-04
- 17 CFR 270.2a‑4 — Definition of "current net asset value" for use in computing the price of a redeemable security · SEC · checked 2026-09-04
- Investment Company Act section 22(e), 15 U.S.C. 80a-22(e) — suspension of redemption and postponement of payment; with the SEC investor guide gloss · US Code · checked 2026-09-04
- Unit Investment Trusts (UITs) (SEC Office of Investor Education and Advocacy) · Investor.gov · checked 2026-09-20
- Investor Bulletin: Publicly Traded Closed-End Funds · Investor.gov · checked 2026-09-20