Hi everyone, thank you for coming back to my blog. I hope you found my last blog interesting and useful, in which I introduced “Why mid-cap stocks should be part of your portfolio.’
In this blog, I will introduce closed-end funds and the difference between them and open-end funds, and whether you should invest in them.
You are most likely familiar with mutual funds, and when investors refer to “mutual funds,” they usually refer to open-end funds.
Although closed-end funds have many similarities, there are also some significant differences. Knowing closed-end funds will help you make more informed decisions about whether they may become an investment tool to your advantage.
Since it is always easier to start with what is known, here is the main difference between open-end and closed-end funds.
- Open-end funds continue to gain and lose investors; when they lose investors, they lose the capital invested by investors. Likewise, when new investors join, they will receive capital.
- Closed-end funds basically own any capital invested when the fund first started operations. They do have some options for increasing capital, but usually not through the process of issuing more shares. This will be explained below.
- Like stocks, closed-end funds can initially be obtained from the company itself in an initial public offering (IPO). After that, fund shares are generally only available on the secondary market. Therefore, just like stocks, you must buy or sell your stocks from other investors.
- In addition, open-end fund shares are usually only sold at the closing price at the end of the day. Closed-end funds are open all day.
- Open-end funds are priced based on the fund’s net asset value (NAV). This is simply the total value of the fund’s holdings and cash on hand (minus any debt that the fund may have) divided by the number of shares issued by the mutual fund company.
- The pricing of a closed-end fund is not based on its net asset value, but, like stocks, based on current market conditions and the price other investors are willing to pay for it. They are almost always priced at a discount relative to the value of the underlying asset.
- Unlisted securities are those that are not listed on the stock exchange, either because they do not meet the requirements or because they do not want the restrictions imposed by listing.
- Unlisted securities may be riskier, but the returns may also be higher. Open-end funds can be a more conservative investment, but this actually depends on the characteristics of closed-end funds. There are widespread risks in every group.
- Closed-end funds can issue preferred stocks, bonds, etc. to raise more funds for investment. Therefore, closed-end funds can borrow funds to increase returns.
- Open-end funds must sell more stocks to accomplish the same thing.