How do closed end investment funds operate? These funds, sometimes called a closed end company, are one of the most basic investment company types. Closed end investment funds operate just like individual stocks do, and this is because the shares of the fund are traded just like stocks on an open exchange market. These are considered closed end because it is only during the IPO, or initial public offering, that this type of fund will raise money. Open end choices can raise money at other times. A set number of shares are issued, and this number usually stays constant. There is a Board of Directors for the fund, and these individuals are the ones who decide on the portfolio manager and the investment advisor. The manager and advisor are the ones who will make the actual decisions concerning the investments for the fund.
After the initial public offering, the market will determine the price of a share for closed end investment funds. The price set by the market can be either more or less than what the net asset value per share is, and if the price is less than many investors would consider it a smart investing choice. Closed end investment funds do not have to worry about keeping a cash reserve in the portfolio for liquidity, because the number of shares in circulation are fixed and are normally in high demand if an investor wants to sell. These shares also have dividend payments just like stocks which are traded on the exchange.
A big advantage in the difference between open and closed end investment funds is that the closed end options do not have the same liquidity needs as an open ended fund does. This means that a closed end choice will have greater investment flexibility, and can invest in sectors and areas that other investment choices may not be able to. One drawback though is that these funds are affected by market factors and volatility. Closed end investment funds operate very similar to a stock, but with some advantages. These investments can be a good choice for many investors, but they are not right for everyone. Make sure that you research and compare each possible fund choice, so that you make the right decisions and protect your investment capital.
Closed end investment funds must be purchased using a broker, and this can mean extremely high fees in some cases. Before you make any final investing decisions, look closely at all of the fees charged by each choice. You may be surprised to find that some funds may charge more than double the amount in fees as others do. Keeping the costs low is one of the ways to get the best possible returns from your investments, so you will need to evaluate and compare the total cost in fees and expenses that each fund charges. This will help you decide whether closed end investment funds are the right choice in your specific investment situation, or whether you should look at other investment types instead.
