| Strangely enough, closed-end funds are more | | | | |
| like stocks or ETFs than what most people | | | | Closed-end funds are plagued with broker |
| consider a mutual fund. Discover the | | | | trading fees. |
| difference between closed-end funds and | | | | |
| open-end funds. | | | | Closed-end funds are generally riskier. |
| | | | |
| What are Closed-end Funds? Despite the name | | | | Closed-end funds are less liquid, meaning |
| similarities, closed-end funds share little | | | | they are much harder to sell. |
| in common with mutual funds (also known as | | | | |
| open-end funds). Sure, investors pool money | | | | Unlike mutual funds, the shares are not |
| together to purchase stocks or bonds and a | | | | redeemable (meaning the company does not have |
| professional manages the fund, but that's | | | | to buy the shares back) Closed-end funds tend |
| where the similarities end. | | | | to charge between 1-2 percent a year for |
| | | | management fees. |
| It helps me to think of a closed-end fund as | | | | |
| a company. But instead of being a company | | | | Closed-end fund price information is not |
| that makes products, this one buys stocks of | | | | always available. |
| other companies. The closed-end fund | | | | |
| "company" still has it's own stock, which is | | | | As a general rule, open-end funds attract |
| traded on an exchange and trades above or | | | | better managment talent because they can grow |
| below its underlying value, or net asset | | | | by attracting new investors over time. |
| value (NAV), in this case. | | | | |
| | | | Open-End vs Closed-End Open-end funds are |
| If you're still confused, try my glossary | | | | bought and sold directly from the mutual fund |
| definition of a closed-end fund. | | | | company. |
| | | | |
| There are approximately 800 closed-end funds, | | | | There is no limit to the number of available |
| valuing around $371 billion in early 2005. | | | | shares because the fund company can continue |
| | | | to create new shares, as needed, to meet |
| Best Mutual FundsLargest Source of Free Info | | | | investor demand. On the reverse side, the |
| About Mutual | | | | entire portfolio may be affected if a |
| Funds!Mutual-Funds-Info.Gd-Invest.com It's a | | | | significant amount of shares is redeemed |
| big industry, but much smaller than the | | | | quickly and the manager needs to make trades |
| open-end, "mutual fund" industry. Closed-end | | | | to meet the demands for cash created by the |
| funds are similar to ETFs, but they are | | | | redemptions. Costs associated with this |
| actively managed (ETFs are passive, | | | | trading activity are shared by all investors |
| index-like funds). | | | | in the fund, so the investors who remain in |
| | | | the fund share the financial burden created |
| What's the Difference Between Open-end and | | | | by the trading activity of investors who are |
| Closed-end Funds? Open-end funds, also known | | | | redeeming their shares. |
| as mutual funds, are open to new investors | | | | |
| (they can create as many shares as needed). | | | | Pricing and Trading: Take Note of the |
| | | | |
| However, when a mutual fund closes to new | | | | NAV |
| investors, that does not make it a closed-end | | | | |
| fund. When a mutual fund closes, it still | | | | Pricing is one of the most notable |
| allows current investors to buy more shares | | | | differentiators between open-end and |
| and when those investors want to sell their | | | | closed-end funds. Open-ended funds are priced |
| holdings, they don't need to find a buyer. | | | | once per day. Every investor making a |
| | | | transaction in the fund on that particular |
| Closed-end funds, on the other hand, have a | | | | day pays the same price, called the net asset |
| fixed number of shares. Much like a new | | | | value (NAV). |
| publicly traded stock, closed-end funds have | | | | |
| an IPO. They also trade according to market | | | | Closed-end funds have a NAV as well, but the |
| demands. Every seller must have a buyer. | | | | trading price may be higher or lower than |
| | | | that value. The actual trading price is set |
| What are the Advantages of Closed-end Funds? | | | | by supply and demand in the marketplace. If |
| Closed-end funds can sometimes be purchased | | | | the trading price is higher than the NAV, the |
| at a discount, meaning they are trading below | | | | fund is said to be trading at a premium. When |
| their NAV. | | | | this occurs, investors are placed in the |
| | | | rather precarious position of paying to |
| Closed-end funds can sometimes be sold at a | | | | purchase an investment that is worth less |
| premium, meaning they can be sold for more | | | | than the price that must be paid to acquire |
| than their NAV. Remember, buy low, sell high. | | | | it. |
| | | | |
| Closed-end funds have access to some | | | | Bottom Line on Closed-end Funds Though |
| investments and strategies that mutual funds | | | | closed-end funds might be attractive to |
| shy away from. Examples include buying | | | | people trying to take advantage of pricing |
| illiquid securities or using leverage. | | | | inefficiencies, I advise most investors to |
| | | | stick to the open variety: mutual funds (or |
| What are the Disadvantages of Closed-end | | | | open-end funds). The fees and liquidity |
| Funds? As mentioned above, the fund shares | | | | associated with closed-end funds make them |
| could be trading at a discount or premium, | | | | less desirable. |
| which could work against you. | | | | |