What Is A Closed Fund?

What is a closed fund? A closed fund is more like a stock than a regular mutual fund. A closed fund is more like a stock than a regular mutual fund. Other terms that you might run across for it is closed-end...

A closed fund is more like a stock than a regular mutual fund. Other terms that you might run across for it is closed-end fund, publicly-traded fund or closed-end investment company. Michelle Smith and the Mutual Fund Education Alliance have this definition for a closed-end investment company, "An investment company that offers a limited number of shares. They are traded in the securities markets, usually through brokers. Price is determined by supply and demand. Unlike open-end investment companies (mutual funds), closed-end funds do not redeem their shares."

These funds have portfolios that are still managed, but are owned by early investors. They no longer sell shares to new investors at the current net asset value (NAV) price. Closed funds are traded however on the open market. In order to purchase them, you treat it like a stock purchase. Brokers tend not to push them as hard as other investment vehicles because their commissions are smaller than with open-ended funds.

Some closed funds do allow existing investors to purchase more shares and the fund does redeem outstanding shares. The suspension of new shares may be temporary or permanent, depending on the opinion of the manager or board of directors. Most closed-end funds shut their doors to new investors because they feared that the asset base was too large. A large asset base can make it difficult for the fund manager to follow the investment strategy outlined in the objective of the prospectus.

Closed funds can be a good investment move as you gain access to the diversity of stocks in it. When buying closed-end funds, you need to know the terms discount and premium in relation to them. Discount refers to the fact that the shares can be bought for less than the net asset value. Premium is the opposite in that the price of a share is above the net asset value. The market determines whether the closed fund is at a discount or premium.

When a closed-end fund starts up, it has an initial public offering or IPO just like any stock. A fixed number of shares are issued and that number usually does not change. This is the best time to purchase shares. Just like an open-ended funds, closed-end funds have a net asset value or NAV. However, the trading price for the fund may be higher or lower than the NAV. Some investors are willing to pay a premium price because of the record of accomplishment of a certain management team.

Just like open-ended mutual funds, closed funds come in a variety of choices. You can find bond funds, balanced funds, stock funds and many other asset allocation choices. There are even domestic and international closed funds. Closed-end funds do have some disadvantages though. They tend to have many broker trading fees and can be riskier because their stocks do not change as often or as easily as an open-ended fund. Closed-end funds are harder to sell in some instances because the company does not have to buy back the shares. This means you sell them on the market and may have a loss.

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