What is a 'Dual-purpose Fund'

A dual-purpose fund is a closed-end fund that offers two stock classes: common shares and preferred shares. Holders of the common shares benefit from any capital gains. Holders of preferred shares benefit from dividend income.

Dual-purpose funds really should be called split-purpose funds. Investors seeking capital gains tend to own the common shares. Risk-averse investors, however, tend to hold only the preferred shares. Few hold both.

More investors owned dual-purpose funds in the late-’70s and early -’80s. Today, few if any exist, although there still are many closed-end funds.

BREAKING DOWN 'Dual-purpose Fund'

Dual-purpose funds first require an understanding of closed-end funds, which are investment companies that, like ETFs, have tickers and trade daily on an exchange. They offer an interest in a specific portfolio of securities run by an active manager. Most offer exposure to specific industries, geographies, markets, sectors or investment styles.

Both closed-end funds and open-end funds offer professional money management and holdings diversification. Both also charge an annual expense ratio and typically make income and capital gain distributions to shareholders.

While open-end mutual funds, by far the most common type, price only once at the end of the day, closed-end funds trade throughout the day. Closed-end funds also require a brokerage account to buy and sell, unlike most open-end funds.

The stock prices of dual-purpose funds, and all closed-end funds, fluctuate based on supply and demand for the fund itself, as well as the changing values of the fund holdings. Exchanges publish the net asset value (NAV) of the fund regularly. However, dual-purposes funds, and all closed-end funds, often trade at a premium of a discount to NAV. The reputation of the fund’s manager as a stockpicker and the popularity of the underlying holdings help determine this discount or premium.

One downside to dual-purpose funds, as well as all closed-end funds, is that some are fairly illiquid.

One of the largest and most liquid closed-end funds is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund.

Dual-Purpose Fund vs. Strips

The common shares of dual-income funds have a parallel in the fixed income called Treasury STRIPS. These zero-coupon bonds separate the bond’s coupons from from the bond or note; an investor's return depends on the difference between the purchase price and the bond's trading value, or face value if held to maturity. Thus, income has no bearing on the return.

Similarly, common shares of dual-income funds strip out the income portion of the return. This payment stream is sold separately and is accessed by buying the preferred shares.

RELATED TERMS
  1. Closed-End Fund

    A closed-end fund is created when a mutual fund raises money ...
  2. Closed-End Management Company

    A closed-end management company is an investment company that ...
  3. Open-End Fund

    Open-end funds sell shares directly to investors based on their ...
  4. Investment Company

    An investment company is a corporation or trust engaged in the ...
  5. Fund Company

    Fund company is a commonly used term to describe a corporation ...
  6. Premium to Net Asset Value

    Premium to net asset value (NAV) is a situation where the value ...
Related Articles
  1. Financial Advisor

    Why You Should Consider These Closed-End Funds

    Advisors looking to recommend closed-end funds to clients might want to consider ones that have withstood the test of time. Here are a few examples.
  2. Investing

    What Are the Advantages of Closed-End Funds?

    Often forgotten, closed-end funds are publicly traded and can be found on the secondary market.
  3. Investing

    Closed-End Vs Open-End Funds

    Much like an individual’s wardrobe, many portfolios are collections of separate items. They combine stocks and bonds and other investments into one product.
  4. Investing

    Closing Mutual Funds: Investment Protection Or Trap?

    Discover the characteristics of closing funds, the reasons why they close and key factors to consider.
  5. Investing

    How to Create Tax-Free Bond Portfolios

    Information to help you decide how to invest in municipal bonds, including mutual funds, individual bonds, ETFs and SMAs.
  6. Investing

    Two Discounted Energy Closed-End Funds to Watch

    Using closed-end funds to buy energy stocks could pay off for patient investors.
  7. Investing

    Liquidation Blues: When Mutual Funds Close

    Underperforming mutual funds can be liquidated, leaving investors down and out.
  8. Financial Advisor

    Top 5 American Funds for Retirement Diversification in 2016

    Discover five mutual funds from industry leader American Funds with high yields that are perfect for retirement savings diversification.
  9. Investing

    4 Alternatives To Traditional Mutual Funds

    A rich offering of attractive alternatives have the open-ended mutual fund facing obsolescence.
RELATED FAQS
  1. What is the difference between closed-end credit and a line of credit?

    Understand the difference between closed-end credit, open-end credit, and lines of credit. Then find out how each are used ... Read Answer >>
Trading Center