An open ended fund is one that sells and repurchases units at all times. When the fund sells units, the investor buys them from the fund. When the investor redeems the units, the fund repurchases the units from the investor. An investor can buy and redeem units from the fund itself at a price based on the net asset value (NAV) per unit. The number of units outstanding goes up or down every time the fund sells new units or repurchases existing units. Therefore the “unit capital” of an open ended fund is not fixed but variable. When the sale of units exceeds repurchase, the fund size increases. When repurchase exceeds sale, the fund shrinks.

In practice, an open-ended fund is not obliged to keep selling new units at all times, though it has an obligation to repurchase units tendered by the investor. Unlike an open-ended fund, the unit capital of a close-ended fund is fixed, as it makes a one-time sale of a fixed number of units. After the offer closes, close-ended funds do not allow investors to buy or redeem units directly from the funds.

To provide much needed liquidity to investors, close-ended funds list on a stock exchange. The fund’s units may be traded at a premium or discount to NAV based on investors’ perceptions about the fund’s future performance and other market factors affecting the demand and supply of the fund’s units. Sometimes close-ended funds offer buy-back of units, thus offering another avenue for liquidity to close ended fund investors.

Source : Investmentyogi