The majority of mutual funds that are used in retail investment accounts and 401k plans are considered to be open-ended. Simply put, you invest your dollars in a fund with many other investors. The manager of the fund then buys stocks, bonds or both and divides the value of the fund by the number of shares that have been issued.

The value is expressed by Net Asset Value (NAV) at the end of every day. When you need to take out money for one reason or another, the mutual fund company is responsible for executing your liquidation request. That means the mutual fund manager must manage the cash in the fund’s portfolio for the number of investors that are contributing and withdrawing from the fund daily.

There are two other “unit” trusts that were created in 1924. The one that seems most confusing to investors are close-end funds (CEFs). These investments have a special place in my heart, but do come with some explanation.

A CEF works like an open-ended fund on one hand — you do have a fund manager, your assets are invested with other investors and you get a daily NAV to know the value of the fund each day. The difference is that a CEF is not an open-ended fund with a set amount of capital that the manager raises in the fund. The manager thus doesn’t manage the cash part of the fund’s portfolio as in an open-ended fund.

The daily Net Asset Value is rarely what you get when you sell the units of the fund. Most CEFs trade at a discount to their NAV, which may create interesting opportunities during periods of higher volatility in the market. This year is no different from looking at fund flows into and out of mutual funds with the largest outflows being in May (a market downturn) and the largest inflows near record highs for the market.

In practice, many retail investors don’t understand the investments they own. When a market declines and people sell based on fear, they tend to sell everything. This potentially creates a domino effect of opportunity for savvy investors with cash into the market.

CEFs have issues with volume. In other words, some days they don’t have as many shares traded daily. When downside volatility occurs, the volume can even go lower.

The retail investor who doesn’t understand this can and does sell into a down market and whatever price the market is willing to pay. The discounts to NAV in 2008-2009 went into the 30% level and sometimes more.

CEFs are not for the faint of heart. You need to check your investment discipline at the door and be willing to accept volatility. Please keep in mind they are not liquid to the degree of an open-ended fund. Also, keep in mind they can use leverage or debt in the fund. CEFs might make sense in your portfolio — and they might not.

Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com or 765-640-1524.