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Different Types of Fund Investments


Just about every fund available will fall into one of four categories: Open-end, Exchange-traded, UIT or Closed-end. To help you make heads or tails of these four fund types, the table below outlines general definitions, pros and cons, liquidity concerns and other important information to help you make wiser decisions about your finances.

Before investing in any mutual fund or exchange-traded fund, carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. Free prospectuses may be ordered from the fund company or send a request to [email protected]. Many but not all prospectuses are available online. Not all mutual funds are available through TradeKing. Read the prospectus carefully before investing. Investment returns will fluctuate and are subject to market volatility so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the fund company. Some specialized exchange-traded funds can be subject to additional market risks.





Open-End Mutual Fund

Exchange-Traded Fund

Unit Investment Trust (UIT)

Closed-End Fund

What it is

A fund that pools the money of many investors and invests in many different securities, selected according to the fund's investing objective and strategy. Most mutual funds are open-end mutual funds; the number of shares varies with demand and the amount of money invested in the fund.

A fund that, like a mutual fund, pools the money of many investors and invests in many securities. Typically, an ETF invests in the securities included in a specific index.

A fund that pools the money of many investors. A UIT invests in a fixed portfolio and holds those securities without buying or selling until the trust's expiration date. A UIT typically holds one specific type of security--for example, municipal bonds.

A fund that pools the assets of many investors. Unlike an open-end mutual fund, a closed-end fund is created by an initial public offering (IPO), has a fixed number of shares and is typically traded on a major exchange, such as the New York Stock Exchange.

Advantages

Diversification

Professional selection of individual securities

If actively managed, manager has flexibility to adjust to changing market conditions (within fund's investment guidelines)

A portion of total return may be capital gains, which may have tax advantages

Diversification

A portion of total return may be capital gains, which may have tax advantages

Typically, lower expenses than an actively managed fund

Can be traded throughout the day or bought on margin

No minimum investment

Diversification

Certainty about the specific investments in the trust

Bond UITs' fixed interest payments provide greater stability of income

Able to target specific date for return of principal (bond UIT)

Professional selection of individual securities

Manager has flexibility to adjust to changing market condition (within fund's investment guidelines)

No minimum investment

Manager's investment decisions are not affected by investor redemptions of shares

A portion of total return may be capital gains, which may have tax advantages

Disadvantages

No assurance that you will receive the amount you invested when you sell your shares

Income amount may vary from payment to payment with changes in portfolio

Value of shares can be affected by high level of shareholder redemptions

May require minimum investment

No assurance that you will receive the amount you invested when you sell your shares

Income amount may vary from payment to payment

Trading fees can make dollar-cost averaging expensive

May not allow automatic reinvestment of UIT income back into the trust

If interest rates rise, bond UIT's income may lag other investments with more flexibility

Typically, a minimum investment is required

No assurance that you will receive the amount invested when you sell your shares

No assurance that you will receive the amount invested when you sell your shares

Income amount may vary from payment to payment with changes in portfolio

Potentially large spread between bid and ask prices

Price stability

No. Share price is determined at end of each trading day, based on net asset value of the fund's investments, which may be affected by interest rates, bond credit ratings, manager's selection of individual securities and maturities, and level of fund redemptions.

No. Share price is determined throughout the day by supply and demand, much as a stock's is.

Yes, if bond UIT is held to trust's termination date. No, if shares are sold early or if UIT holds stocks; may be affected by changes in interest rates, credit ratings of individual bonds, or stock prices.

No. Price of shares is determined throughout the day by supply and demand, much as a stock's price is. Price is typically lower than its NAV, but may also be higher.

Actively managed?

May be actively or passively managed

Not typically

Passively managed after initial purchase of securities for trust

Typically, actively managed

Fixed number of shares?

No

No

Yes (called "units")

Yes, at time of initial public offering. However, fund may also offer existing shareholders the right to buy additional shares.

Termination date?

No

No

At preset termination date; may be determined by maturities of bonds in trust

No

Liquidity

Highly liquid; fund company will redeem shares at any time at current NAV

May or may not be easy to find a ready buyer

Issuer would only redeem shares by buying them on the open market

Somewhat liquid, depending on provisions of trust. Trust will typically buy back investors' units at approximate current NAV

Fund company does not redeem shares, which are bought and sold on the open market

May or may not be easy to find a ready buyer

Reinvest income automatically?

Yes

Possible, but might not be cost-effective

Typically, no

Typically, no, though some closed-end funds may offer a dividend reinvestment plan

Costs

Yearly management fees and expenses

Transaction cost for purchase or sale

Upfront fee for initial purchase of units

Transaction cost for purchase or sale






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