Unit trusts (or mutual funds) could be open-ended or close-ended, and that basically refers to how the shares (that is, units) are issued and redeemed. A unit trust is a collective investment scheme where a group of investors pool their money together to be invested and managed by a professional fund manager. Often, this is an institutional fund manager. Examples of such funds in our market include ARM's Discovery Fund, IBTC Nigerian Equity Fund, CORAL Income Fund, UBA Equity Fund, etc.
Open-ended Fund
A fund is open-ended when it can issue or redeem units at any time. In effect, there is no restriction as to how much shares that can be issued. For as long as there are investors wanting to buy units of the fund, the fund manager can issue additional units. Such fund has a commencement date for its subscription, but no closing date. They are usually not traded on the stock exchange, but that does not imply that investors are stuck with it. No, because the fund manager will similarly redeem units when any investor wants redemption. Open-ended funds therefore issue and redeem their units on demand. Redemption is at a valuation that is done at the time of redemption, based on the fair market value of the securities held by the fund. The net asset value per unit is computed on an on-going basis.
Close-ended Fund
In this case, a fixed number of units of the fund are sold, and the offer has a time-period, as with share issues by public companies. After the subscription period, an intending investor can no longer buy units of the fund from the fund manager. Such funds have a maturity date at which the funds are either redeemed or converted to an open-ended fund.
Some funds can allow exit before maturity but charge an exit load which decreases as it gets closer to maturity. In other cases, no exit is allowed, but the units are listed and traded on the stock exchange. In that case, the value the investor realises, if he wants to exit, is the market price at which the fund trades on that date.
One major fact to note is that while you can progressively build up your investment in an open-ended fund by buying more units, say each month, that flexibility is not available with a closed fund.
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