When seeking a stable income vehicle, more people are investing in closed end funds. A closed end fund is a fund that raises capital by issuing shares through an initial public offering, or IPO. Once all of the shares in the IPO are sold, the fund is closed to new investments by the sponsor company. The fund is listed on a national exchange, and the fund’s shares are bought and sold in transactions with other investors, not with the sponsor company itself. It is bought and sold just like a stock. If an investor does not purchase shares in the fund when the initial public offering was made, he or she will not be able to purchase shares later from the company. The investor will have to search for a shareholder who already holds shares in that fund and purchase them. This can make investing in closed end funds very difficult.
The best closed end funds are funds that allow the buyer to purchase then at prices lower than the net asset value and then sell them at a higher value in the future. The price of a closed end fund is influenced more by supply and demand than the net asset value. A closed end fund with a high demand and low supply will be easier to sell at a higher price than a closed end fund with a low demand and high supply. Another factor that will separate the best closed end funds from the rest is the brokerage fee. The brokerage fee, or load, tends to be high because it offsets the fact that no further investment is occurring. Since the fund is closed end, the mutual fund company does not have to buy back the shares it sold. This limits the liquidity of the fund. In order to redeem shares, the investor would have to find another investor who would be willing to buy the shares at the price the closed end fund shareholder sets.
The investing strategy of the best closed end funds will depend upon the investor’s needs. People who require reduced taxes on income may choose a closed end fund that uses a tax-fee income strategy, which invests mainly in municipal bonds. The best closed end funds can be purchased for less than its net asset value, has a low supply and high demand, and charge a low brokerage fee. Diligent research that can be conducted on many financial web sites and quality advice from an experienced financial advisor will help an investor find the best closed end funds for their needs.