Closed End Mutual Funds

Many investors confuse closed-end funds with mutual funds. The fact of the matter is that both have major differences that investors should be aware of. Unlike traditional mutual funds, closed-end funds are known to act much like traditional stocks do. The reason behind this is because the value of closed-end funds is dictated by the main driving force of the markets. These forces are the popular supply and demand factors that all investors are fully aware of. Mutual funds, also associated with open-end mutual funds, deal with the periodic issuance of new shares. These new shares however, are not available to be traded in the open markets.

Even though these two types of funds are often confusing to investors, there are some similarities that tie them together that end up creating closed-end mutual funds. Both closed-end funds and mutual funds deal with stocks and bonds. Investment advisors are known to manage both different types of funds. They can both be actively managed and passively managed. Capital gains and dividends that are earned with both closed-end funds and mutual funds are paid out to the shareholders. The United States SEC regulates both closed-end funds and mutual funds. Because of these many similarities, many investors call them closed end mutual funds. With all the similarities between these two, there are significant differences that leave many investors confused. Closed-end funds deal with trading on the New York Stock Exchange or the NASDAQ, where mutual funds are not. Closed-end funds are also purchased at a market price instead of the value of the underlying assets that back them up. Supply and demand dictate the value of closed-end funds while mutual funds are not. Mutual funds also cannot be traded throughout the day like closed-end funds can. And finally, closed-end funds are often used by investors as a way to leverage other investments.

The differences and similarities between both closed-end funds and mutual funds are quite clear, but there are a lot of gray areas in the markets that leave investors confused. A closed-end fund is created through IPOs, which stands for initial public offerings. An investment firm will raise a certain amount of capital through and IPO. At that point, the assets are then bundled up into shares or stocks that are bought and sold in the stock exchange. These types of funds are also called closed-end investments or closed-end mutual funds. An open-end fund, which is primarily what a mutual fund is, works differently.

Investors should take the time to know the main differences between open-end mutual funds and closed-end mutual funds before they invest. Closed-end mutual funds deal with an investment advisor that specializes in a particular market such as industry or the geographic market. A traditional mutual fund is managed by an investment management team that diversifies the investments over a broad market. Depending on what an investor is looking for, they will invest in either closed-end mutual funds or traditional mutual funds that are basically open-end funds.

Closed-end mutual funds will fluctuate in value according to the fluctuations associated with the stock exchange. This fact alone displays a certain amount of risks that are higher when compared to traditional mutual funds. However, with these risks come more opportunities to the investors. Whereas traditional mutual funds are secure, they do not allow the investor to take advantage of rising rates within the stock exchange. If an investor is looking for security with their investments, they are advised to deal in mutual funds. If the investor is looking for opportunities, they are advised to deal in a closed-end mutual fund. Investors should research both models before making their decision to invest.

Comments are closed.