Hi everyone, thank you for coming back to my blog. I hope you found my last blog interesting and useful, where I covered ‘Why Mid-Cap Stocks Should Be Part Of Your Investment Portfolio.’
In this blog, I’m going to cover closed-end funds and how they differ from open-end funds, as well as if you should invest in them or not.
You’re most likely familiar with mutual funds, and when investors refer to “mutual funds,” they’re commonly referring to an open-end fund.
While closed-end funds have many similarities, there are some significant differences too. Understanding closed-end funds will help you to make a more informed decision regarding whether they may be beneficial investment vehicles for you.
Since it’s always easier to start with something one already knows, here are the principal differences between open-end and closed-end funds.
- Open-end funds are continuously gaining and losing investors; when they lose an investor, they lose the capital that investor had invested with them. Likewise, when a new investor comes aboard, they gain capital.
- Closed-end funds essentially have whatever capital was invested with them when the fund first began operations. They do have some options to increase their capital, but it is normally not through the process of issuing more shares. This will be explained below.
- Like stock, closed-end funds are originally available from the company itself in an initial public offering (IPO). After that, the fund shares are generally only available on the secondary market. So, like a stock, you would have to purchase or sell your shares to another investor.
- Also, open-end fund shares are typically only available at the end of the day at the closing price. Closed-end funds are available all day long.
- Open-ended funds are priced based on the net asset value (NAV) of the fund. This is simply the total value of the fund’s holdings and cash on hand (minus any debt the fund may have) divided by the number of shares that have been issued by the mutual fund company.
- Closed-end funds are not priced based upon their NAV, but like stocks, upon the current market conditions and what another investor is willing to pay for it. They’re almost always priced at a discount relative to the value of the underlying assets.
- Unlisted securities are those stocks that aren’t listed on the stock exchange, either because they cannot meet the requirements, or because they simply don’t want the restrictions that come with being listed.
- Unlisted securities can be riskier, but the rewards can be greater as well. Open-end funds can be a more conservative investment, but it really depends on the personality of the closed-end fund. There is a wide range of risks within each group.
- Closed-end funds can issue preferred stock, bonds, and more to raise more capital for investing. So closed-end funds can borrow to enhance their returns.
- An open-end fund would have to sell more shares to accomplish the same thing.
