Open-ended or closed-ended investment funds? Which suits you in the Arab market

When an Arab investor thinks about adding a fund to their portfolio, they face two basic options: open-ended funds or closed-ended funds. The choice is not just a matter of name, but a decision that determines the liquidity of your investments, how unit prices are calculated, and your ability to control risk. In this article, we will explore the differences between these funds, outline the advantages of each, and provide practical steps to help you choose the right one for you.

Open-ended funds: flexibility throughout

Open-ended funds allow investors to buy or sell units at any time during the trading day. Their value is calculated based on the net asset value (NAV) at the end of each day, meaning the price is determined by the total value of assets minus liabilities, divided by the number of units in circulation.

Advantages of open-ended funds:

• High liquidity; you can withdraw your money with minimal waiting time, usually within one or two days.
• The unit price directly reflects market performance, so if assets rise, NAV increases, and vice versa.
• Easy subscription with small amounts, as management often accepts investments with low minimum thresholds.

However, on the downside, open-ended funds may face internal liquidity pressure if investors withdraw large amounts, especially during periods when assets are illiquid (such as real estate or long-term bonds). Management may be forced to sell part of the fund’s holdings to meet redemption requests, which could cause unwanted volatility in returns.

Closed-ended funds: stable investment with pricing opportunities

Closed-ended funds are launched to the market via an initial offering set by the fund manager, after which their units trade on the exchange like shares. The number of units is fixed, meaning there is no direct subscription or redemption by investors after the initial offer.

Advantages of closed-ended funds:

• Opportunity to benefit from price differences between market price and NAV, opening the door to buying when the share is relatively low.
• Stable long-term management; no liquidity pressure that frequently alters the fund’s composition.
• Often geared toward investing in illiquid assets (such as real estate or infrastructure) because investors cannot redeem units immediately.

Among the drawbacks, the fund’s liquidity depends on trading volume on the exchange; you may struggle to sell units if trading activity is low. Also, the market price may be higher or lower than NAV, meaning you could pay a premium or receive an unexpected discount.

How to choose the right fund for you?

The choice between open-ended and closed-ended funds is not random; it depends on personal factors and strategy. We will discuss the key criteria you should consider:

• Financial goal: If your goal is regular withdrawals or needing quick liquidity, open-ended funds are suitable. If you plan long-term investing and prefer stable composition, closed-ended funds may be a better option.
• Risk level: Open-ended funds are typically more exposed to daily market fluctuations, as NAV changes every day. Closed-ended funds may reduce daily volatility if they invest in long-term assets.
• Fees: Compare the expense ratio (TER) between the funds. Open-ended funds may carry higher fees due to the need to update NAV and manage redemption processes.
• Investment type: Some sectors (such as real estate or energy) are more commonly found in closed-ended funds to avoid liquidity pressure. If you are interested in a specific sector, check where investment is concentrated.
• Tax situation: In some Arab countries, profits from closed-ended funds are subject to different tax treatment than open-ended funds. Consult your tax advisor to determine the more tax-efficient option.

Practical example: Ahmed, a thirty-year-old, has 30,000 riyals he plans to add to his portfolio to save for a house down payment in five years. He prefers flexible liquidity because he might need part of the amount to cover unexpected expenses. In this case, the open-ended fund suits him better, as he can easily sell units when he needs the money.

Another point worth noting is the fund’s size. Larger funds tend to be more transparent and provide detailed regular reports, while smaller funds may be more prone to price volatility due to investor flows.

Practical steps to get started

1. Define your time horizon and risk tolerance.

2. Review the fund’s prospectus and look for expense ratios and additional fees.

3. Compare open-ended and closed-ended funds in terms of liquidity, historical returns, and asset allocation.

4. If you choose an open-ended fund, open a brokerage account with a reputable firm and start buying via the online platform.

5. If you select a closed-ended fund, monitor the share price on the exchange and use limit orders to avoid paying a premium above NAV.

In the end, there is no single correct answer for everyone. Understanding the difference between open-ended and closed-ended funds helps you build a portfolio that aligns with your personal needs and reduces unexpected surprises.

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Disclaimer: This content is for educational and informational purposes only and does not constitute financial or investment advice. Consult a professional before making any financial decision.