When a CEF is founded, it has an initial public offering and a fixed number of shares are issued, just like any other public company. Those shares then trade on a stock exchange and new investors in the fund obtain their shares by buying them from existing investors who are looking to sell, also just like any other public company. A mutual fund, by contrast, issues an unlimited number of shares and issues new shares to each new investor. There is virtually no difference in the liquidity of a CEF and that of a mutual fund. The most obvious difference is that a CEF does not have a constant inflow or outflow of cash.
Mutual funds take in new money from, and issue new shares to, each new investor.
This can force the mutual fund manager to sell off portfolio holdings based on demand from shareholders who want to get out of the fund, which can often happen at the absolute worst time, such as a sharp market downturn. The constant inflows of money can also make mutual funds victims of their own success. The inflows must be invested by the portfolio manager at times when good investment opportunities may not exist, which can create a drag on the fund's performance. The portfolio manager is thus able to control the timing of when portfolio securities are bought or sold and can choose the time horizon for his or her investments that best fits the fund's philosophy. This can be especially important in market downturns.