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What is a closed-end fund?

Closed-end fund

Alongside open-end funds, closed-end funds are one of two major types of mutual funds. The closed-end fund definition refers to a portfolio of pooled assets, such as stocks, bonds or commodities, which raises a fixed amount of capital through an initial public offering, or IPO, subsequently listing its shares on the stock exchange for trade. Other names for a closed-end fund include the closed-end mutual fund and closed-end investment. 

Closed-end funds are professionally managed to achieve diversification by investing in a collection of equities and other financial assets, rather than in a single stock. To do so, these pool the resources of several investors to invest in a larger and wider scale.

In a closed-end fund, managers do not create new shares to meet demand from investors. Instead, the shares can be bought and sold only in the market.

Where have you heard about closed-end funds?

Most investors are usually familiar with the terms “mutual funds” and “exchange-traded funds”, while closed-end funds remain less famous. However, in fact, the latter have been around for years, with some closed-end funds dating back to the late 19th century.

If you have ever been interested in pooled investments, you may have heard about closed-end funds from investment managers or financial advisors. There is a plethora of closed-end funds available to international investors today, covering the investment universe from bonds to stocks to commodity-driven funds. 

What you need to know about closed-end funds.

Generally, a closed-end fund does not continuously offer its shares for sale. Instead, it has a fixed number of shares outstanding, which are first sold to the public in IPOs, like stocks, and then subsequently offered in secondary markets. Moreover, a fund generally is not required to buy its shares back from investors upon request. Thus, closed-end fund shares are mostly not redeemable.

After its IPO, the fund typically trades on a major global stock exchange, such as the London Stock Exchange, the New York Stock Exchange or the Toronto Stock Exchange. In the US, closed-end funds must be registered with the Securities and Exchange Commission (SEC) and are subject to SEC regulation.

Shares of closed-end funds are traded anytime between market opening and closing hours, with their value fluctuating according to supply and demand throughout the entire trading day. For this reason, in order to limit potential losses or protect gains of a trade, many investors employ advanced types of orders, such as stop orders and limit orders.

The majority of closed-end funds are actively managed. The fund’s manager buys and sells securities within the portfolio to outperform the fund’s benchmark index like the Standard & Poor's 500 Index.

There are many types of closed-end funds. Each may come with different investment objectives and strategies. Their investment portfolios typically concentrate on a specific industry, market sector or geographic market. Moreover, funds can also be subject to different risks and volatility, as well as fees and expenses.

Founded in 2007, the Eaton Vance Tax-Managed Global Diversified Equity Income Fund, ticker symbol EXG, is one of the world's largest closed-end funds, with a market capitalisation of over $2.55 billion. Its key investment objective is to provide current income and gains, as well as capital appreciation.

As there is a limited number of their shares, closed-end funds can trade at a discount or a premium to their net asset value, or NAV. Shares sold at a price lower than the NAV are at a discount, while shares sold at a price higher than the NAV are sold at a premium. This feature of closed-end funds usually attracts bargain-hunting value investors.

Typically, closed-end funds pay distributions monthly or quarterly. These can include income generated by the fund, such as dividends, interest income or capital gains, or a return of capital/principal. 

Before buying any fund shares, make sure to equip yourself with as much knowledge as possible by reading all of a fund’s available information, such as a prospectus and most recent shareholder report.

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