Close-ended mutual funds

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See closed fund if needed, which is not the same thing as a close-ended fund.

A close-ended mutual fund is legally known as a "closed-end company," and is generally permitted to invest in a greater amount of "illiquid" securities than a mutual fund.

A type of an investment company, a close-ended mutual fund sells a fixed number of shares at one time (in an initial public offering), after which the shares typically trade on a secondary market, such as the New York Stock Exchange. A close-ended fund is not required to buy its shares back from investors upon request.

A close-ended fund is subject to Securities and Exchange Commission (SEC) registration and regulation. The definition of "closed-end company" can be found in Section 5 of the Investment Company Act of 1940.

Even though it goes by the name of mutual fund, a close-end mutual fund can be said to be a cross between a mutual fund and a stock.

It does resemble the mutual fund in that it is formed using capital generated from investors and invested in diverse assets. But unlike the mutual funds, the shares of a close-end mutual fund are not redeemed by the investment company using the net asset value.[1]

Close-end mutual funds make an initial public offering of shares as a way of generating capital from the investors. This capital is then invested in a diverse portfolio which is used for calculating the net asset value, that is the actual value per share, of the fund.

While the NAV ("Net asset value," or "NAV," of an investment company is the company’s total assets minus its total liabilities) indicates the actual value of the fund, it is not necessary that the investor will realize the same value for the shares he holds. This is because after the initial public offering, the investment company managing the fund does not have any obligation to redeem the shares.

The shares are traded in the open market much like stocks, according to the rates decided by the demand and supply situation. Therefore a share in a close-end fund could sell at a premium, that is, at more that its actual value or at a discount, that is, below its NAV or the actual value.

It is important to differentiate between a close-end mutual fund and a closed fund. Unlike a close-end fund, a closed fund is a regular mutual fund that has stopped selling shares and closed the fund to new investors.


References

  1. "Close-end mutual funds explained”. Helium.