CLOSED-END FUNDS

A closed-end fund (or closed-ended fund) is a collective investment scheme with a limited number of shares. It is called a closed-end fund (CEF) because new shares are rarely issued once the fund has launched and because shares are not normally redeemable for cash or securities until the fund liquidates.

Typically, an investor can acquire shares in a closed-end fund by buying shares on a secondary market from a broker, market maker, or other investor as opposed to an open-end fund where all transactions eventually involve the fund company creating new shares on the fly (in exchange for either cash or securities) or redeeming shares (for cash or securities).

The price of a share in a closed-end fund is determined partially by the value of the investments in the fund and partially by the premium (or discount) placed on it by the market. The total value of all the securities in the fund divided by the number of shares in the fund is called the net asset value (NAV) per share. The market price of a fund share is often higher or lower than the per share NAV: when the fund’s share price is higher than per share NAV it is said to be selling at a premium; when it is lower, at a discount to the per share NAV.

In the United States, closed-end funds are referred to under the law as closed-end companies, and they form one of four SEC recognized types of investment companies along with mutual funds, exchange-traded funds, and unit investment trusts. Other examples of closed-ended funds are investment trusts in the United Kingdom and listed investment companies in Australia.

*Mutual Funds involve a high degree of risk and are not appropriate for all investors.