Closed Ended Mutual Fund

A closed ended fund is an investment vehicle that issues a limited number of shares for a specific period through an initial public offering (IPO). It is a type of mutual fund ideal for investors who desire higher returns and can wait for the yields until maturity. However, it means they cannot redeem or repurchase their holdings until the fund matures.

The closed ended mutual fund, actively managed by an investment management company or fund manager, acts as a publicly listed investment firm or security. It trades at a premium or discount to net asset value per share on stock exchanges, and its price fluctuates according to supply and demand. Examples of it include municipal bond funds and global investment funds.

• Closed ended mutual fund meaning refers to an investment structure that raises capital by issuing a defined number of shares in the open market for a certain period through an IPO.
• It cannot issue new shares, and investors cannot redeem or repurchase their shares until the fund matures.
• A closed ended fund is publicly traded on a stock market at a premium or discount to NAV per share, is registered with a securities commission, and is actively managed by an investment management firm or a fund manager.
• Investors can buy or sell closed end fund shares from traditional or online brokers in the secondary market for a fee. However, its price fluctuates during the trading day due to variations in supply and demand and the fund value.

A closed ended fund lists on the stock exchange and issues a limited number of shares through an IPO to raise capital. It has a maturity date, which means it is only issued once, and no more shares are issued, or exiting shares are bought back or redeemed until that day. Investors can buy or sell shares in the secondary market, depending on the supply and demand. The fund is "closed to new investors" once all of the shares have been sold.

A money manager or investment management firm typically controls the closed ended fund. The fund pools investor capital through an IPO to invest in a basket of securities, such as stocks, bonds, etc., speculative investments, illiquid assets, preferred shares, alternative asset classes, or debts. In exchange, investors receive shares at the net asset value (NAV) per share valid for that day equivalent to their initial investment. Furthermore, they manage investor portfolios and make decisions regarding buying, selling, and holding shares.

• The fund house or company must be registered with a securities commission, such as the United States Securities and Exchange Commission.
• Investors must have a brokerage account and can buy or sell shares from traditional or online brokers for a fee.
• Shareholders receive partial ownership in the underlying securities and a portion of the income and capital gains generated by the fund.
• The fund gets closed for subscription or sale before the investment matures, and hence no money flows in or out of it till then.
• It trades on the open market with its price fluctuating all the trading day due to changes in the supply and demand and the fund value.
• The fund offers less liquidity, so retail investors should opt for it carefully.
• Using a heuristics method for investments could be risky due to closed ended funds' uncertain track records.

When comparing open ended and closed ended mutual funds, the former offers more flexibility regarding the amount to be invested, investment tenure, and expected returns. On the other hand, the latter only permits yields to be withdrawn once the investment has reached maturity. Furthermore, unlike an open ended fund, the closed ended fund shares are fixed, i.e., investors can only sell a certain number of shares.

Let us consider the following closed ended mutual fund examples to understand the concept well:

Example #1

Martha invested $1,000 in a closed ended fund for three years. She was sure she would not need any amount in between to serve any purpose. However, she suffered a medical emergency within a year of investing and hence tried to withdraw her holdings as required.

Unfortunately, the money manager informed her that she could not redeem her investment before the completion of three years. As a result, Martha had to apply for other loan options to deal with her then-medical expenses.

Example #2

The closed-ended investment companies Cornerstone Strategic Value Fund and Cornerstone Total Return Fund announced that they would maintain their 2021 distribution policy for 2022. Accordingly, the dividend percentage for the calendar year 2022 will stay at 21%, and it will be applied to the NAV of each fund as of the end of October 2021.

Investing in a closed-end mutual fund provides investors with a reliable source of income. As a result, they can plan significant expenditures based on the expected return on investment.

While there are numerous advantages to investing in such mutual fund schemes, investors should know the drawbacks before doing so:

This has been a guide to Closed Ended Mutual Fund and its meaning. Here we discuss features of closed ended mutual fund, along with examples, pros, and cons. You can learn more from the following articles –

• Mutual Fund Expense Ratio
• Types of Mutual Funds
• Mutual Fund Analyst