Question

Open-end equity mutual funds find it necessary to keep a significant percentage of total investments, typically around 5% of the portfolio, in very liquid money market assets.

Closed-end funds do not have to maintain such a position in “cash-equivalent” securities. What difference between open-end and closed-end funds might account for their differing policies?

Short answer

Open-end funds are obligated to honour redemptions and receive deposits from investors. So, they keep a part of their portfolio in very liquid assets.

Step-by-step solution

Definition

Open-end mutual funds and closed end mutual funds are called managed companies in United States

Explanation on difference policies of open-end and closed-end funds

It is true that though both these funds are categorized as managed investment companies, there are some differences in their policies with respect to keeping a percentage of investment in liquid money market assets.

It is because open-end funds are obligated to honour redemptions and receive deposits from investors. This flow of money necessitates retaining cash. On the other hand, close-end funds no longer take and receive money from investors. As such, they are free to be fully invested at all times.