Closed-End Funds
A "closed-end fund," legally known as a "closed-end company," is one of three
basic types of
investment company. The two other basic types of investment companies are
mutual funds and
Unit Investments Trusts (UITs).
Here are some of the traditional and distinguishing characteristics of
closed-end funds:
-
Closed-end funds generally do not continuously
offer their shares for sale. Rather, they sell a fixed number of shares at one
time (in the initial public offering), after which the shares typically trade on
a secondary market, such as the New York Stock Exchange or the Nasdaq Stock
Market.
-
The price of closed-end fund shares that trade on
a secondary market after their initial public offering is determined by the
market and may be greater or less than the shares’
net asset
value (NAV).
-
Closed-end fund shares generally are
not redeemable. That is, a closed-end fund
is not required to buy its shares back
from investors upon request. Some
closed-end funds, commonly referred to as
interval
funds, offer to repurchase their
shares at specified intervals.
-
The investment portfolios of
closed-end funds generally are managed by
separate entities known as "investment
advisers" that are registered with the
SEC.
-
Closed-end funds also are permitted to
invest in a greater amount of "illiquid"
securities than mutual funds. (An
"illiquid" security generally is
considered to be a security that can’t be
sold within seven days at the approximate
price used by the fund in determining NAV.)
Because of this feature, funds that seek
to invest in markets where the securities
tend to be more illiquid are typically
organized as closed-end funds.
Closed-end funds come in many varieties.
They can have different investment
objectives, strategies, and investment
portfolios. They also can be subject to
different risks, volatility, and
fees and
expenses.
Keep in mind that just because a fund had
excellent performance last year does not
necessarily mean that it will duplicate that
performance. For example, market conditions
can change and this year’s winning fund
could be next year’s loser. To understand
the factors you should consider before
investing in a mutual fund, read
Mutual Fund Investing: Look at More Than a
Mutual Fund's Past Performance. In
addition, you should carefully
read all of
a fund’s available information,
including its prospectus and most recent
shareholder report before purchasing mutual
fund shares.
Closed-end funds are subject to SEC
registration and regulation, and are subject
to numerous requirements imposed for the
protection of investors. Closed-end funds
are regulated primarily under the Investment
Company Act of 1940 and the rules adopted
under that Act. Closed-end funds are also
subject to the Securities Act of 1933 and
the Securities Exchange Act of 1934. You can
find the definition of "closed-end company"
in
Section 5 of the Investment Company Act.
http://www.sec.gov/answers/mfclose.htm |
