Closed End Mutual Funds- A Limited Amount Of Shares
There are many different types of mutual funds and they can be divided and then divided again in many different categories and subcategories. One type of mutual fund division is called an open-end fund. Essentially, what makes this type of mutual fund different from the others is that it is, as its name suggests, open-ended. It has no predetermined number of shares so basically, the more investors that choose to put their money into that fund, the larger that mutual fund will become.
On the other hand, the counterpart of this type of mutual fund is called the closed end mutual fund. Again, like its name suggests, this type of mutual fund has a specific number of shares that has already been predetermined. These shares of the mutual fund can be traded on the New York Stock Exchange. Some categories of funds that fall into this division are world stock funds, general stock funds, specialized stock funds, REIT's, and bond funds.
Usually, mutual funds have a manager who decides where to invest the money that people are investing into the mutual fund. When many people decide to put their money into a mutual fund, the manager will just buy more stock to accommodate the growing demand. This causes the assets of the mutual fund to increase. In contrast to this, though, closed-end mutual funds, also known as CEF's, have a set and predetermined amount of shares. Once all the shares are purchased, the only way that new investors can get their foot into the door is to buy shares from current owners. These shares are also publicly traded on an exchange and are therefore subject to the movements of the market in that their price can fluctuate based on the demand. The price will go up if more people are looking to buy and the price will go down if more people are looking to sell their shares in the fund.
There are two values that are important for investors and potential investors of a closed-end fund- the NAV, net asset value or the value of all the assets in the fund, and the share price at which the shares of the fund traded last. The shares of a CEF can be sold at a discount, lower than the NAV, or at a premium, higher than the NAV. These price fluctuations are caused by the buyers and the demand for shares in the particular mutual fund. Typically though, most closed-end mutual funds trade at a bit of a discount from the net asset value. Although these types of mutual funds can be sidestepped and ignored by investors, they offer good values and can be very sound and profitable investments. Closed-end mutual funds have claimed billions of dollars in their market.
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