20 Investments: Closed-End Investment Fund

What Is It?
A closed-end fund is an investment fund that issues a fixed number of shares in an actively managed portfolio of securities. The shares are traded in the market just like stocks, but because closed-end funds represent a portfolio of securities they are very similar to a mutual fund. Unlike a mutual fund, the market price of the shares is determined by supply and demand and not by net asset value.

Closed-end funds are usually specialized in their investment focus. For example, one might concentrate its focus on a particular geographic region. They invest in stocks, bonds and other securities to gain a bit of diversification, but because they focus on one region or industry they are not diversified to the overall market. There are several hundred different closed-end funds actively traded on North American stock markets.

There are also "dual purpose" closed-end funds, which simply means that they have two classes of shareholders: preferred shareholders who receive mainly dividends as income, and common shareholders who profit from the capital appreciation of the fund's share price.

Objectives and Risks
Objectives can vary from fund to fund, so it is important to read the prospectus before investing. (To learn more, see Don't Forget To Read The Prospectus!) Some closed-end funds have capital appreciation as their primary concern, while others are more interested in income.

How to Buy or Sell It
Closed-end funds can be bought on various stock markets with the assistance of a full service or discount broker. There is no minimum number of shares to buy, and selling the funds is very easy and quick. When purchasing a closed-end fund, you are typically charged the usual brokerage commission as well as an annual management fee, usually under 1%.

Strengths These funds are easy to buy and sell on financial markets. Furthermore, they are regulated by the Securities and Exchange Commission. The funds usually invest in hundreds of companies, so they offer good diversification in certain areas. If bought in a tax-deferred account, closed-end funds are a great investment for long-term capital appreciation.

Weaknesses Fixed interest payments are taxed at the same rate as income. The price of the closed-end fund is not exclusively linked to the performance of the securities held by the fund. The fund\'s share price depends on supply and demand in the open market.

Three Main Uses Capital Appreciation Income Safe Tax Deferred Investment