Closed-End Funds Basics

Make an informed decision regarding adding closed-end funds to your investment portfolio

A closed-end fund is a way for companies to make fast cash by offering a specific number of shares via an initial public offering. Just as with any investment, there are risks and benefits to investing in these funds. You should consider the effect the funds will have on your portfolio prior to investing.

Understanding the closed-end funds basics allows you to make informed decisions about your investment portfolio. Consider the following suggestions:

1. Understand the reasons companies will offer closed-end funds to investors.

2. Consider the specific risks and benefits of investing in closed-end funds.

3. Keep current on events that may affect closed-end funds.

 

Know the function and purpose of closed-end funds

A closed end fund provides a company the opportunity to raise a fixed amount of capital by selling a predetermine number of shares at an initial public offering. Once someone buys these shares, they can then be set up and traded on a normal stock market.
Try: The Securities and Exchange Commission offers closed end fund information, including a detailed definition of how it determines what funds are closed-end funds. Investopedia offers an easy to understand explanation of closed-end funds.

Learn the closed end funds fundamentals

Unlike open-end funds, companies which sell closed-end funds aren't required to buy the shares back if an investor decides he wants to sell the shares. Investors make money from these funds through dividend sharing, interest and capital gain distributions.
Try: Investment Company Institute offers in depth information concerning the different types of closed-end funds, including closed-end bond funds, investment trusts, closed-end mutual funds and closed-end stock funds. This company also has information about the role of a closed-end management investment company. Nuveen Investments offers information about the fundamentals of closed-end investing, including the benefits and risks.

Stay up to date on the latest news about closed-end bond funds

Closed end funds are updated frequently, sometimes as often as every business day. Knowing the current information about the closed-end funds you invest in allows you to make informed decisions about how to manage your investment portfolio. Trends in consumer spending habits, world events, industry specific events and political events can all affect closed-end funds. Even if you use an investment manager, you should still stay up to date on the values of your funds.
Try: You can find news and updates about closed-end funds on the Closed-End Fund Association website. This website maintains news articles for the past three years. Morning Star offers closed-end fund reports and news articles. You can also get fund analysis by becoming a member of the website.

 

• Consult with a financial advisor to determine the type of closed end fund that best suits your individual investing preferences.

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