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Closed-End Funds Mutual Funds

If you've been researching the stock market for a while, then you have probably heard talk about mutual funds by now. Mutual funds are extremely popular among investors. After all, there are about 10,000 of them in total. Despite their popularity, there is still one kind of mutual fund that you might not be aware of: the closed-end mutual fund.

Mutual funds come in two different forms, they are either open-end or closed-end mutual funds. The most common form of mutual fund is the open-end fund, but there are still quite a few closed-end mutual funds out there. Although they both are based on people pooling their money to buy a group of stocks or bonds, there are still quite a few differences among the two.Closed-end mutual funds closely resemble stocks. This is because they are a combination of a stock and a mutual fund. They are stocks traded on stock exchanges, just like companies such as Disney or Pepsi. Rather than filling out forms and sending them in to the mutual fund family, you can buy the shares just like you would for any other stock.

When someone wants to create an open-end mutual fund, they have to find a lot of investors before they open the fund. This gives them enough money to start with. They then begin issuing shares to regular investors. Over time, the amount of assets that the fund has will vary as investors buy and sell shares. The size of the fund will fluctuate because if an investor wants to sell their shares, the mutual fund has to pay them in cash right away. If the fund starts to do really well, more investors will invest in it and it will grow faster. However, if the fund does poorly, the investors might sell their shares quickly, thus shrinking the size of the mutual fund.Closed-end mutual funds work a little differently than this. Like open-end mutual funds, they must first start by gathering investments from the public. Once this is done, they issue a certain amount of shares. Because only a certain amount of shares are issued, if a person wants to sell their shares they have to find someone who wants to buy them and likewise with buying shares. This keeps the mutual fund's size from fluctuating. For example, if John Doe creates a $500 million closed-end mutual fund, it will remain that size forever unless its portfolio increases or decreases. Many portfolio managers like closed-end mutual funds because if they do poorly one year, they don't have to worry about losing all of their investors.Another point where closed-end mutual funds differ is in their Net Asset Value (NAV). To figure the NAV of a regular mutual fund, you divide the total value of all of the holdings and the number of shares. With a closed-end mutual fund, the price you see when you look up a quote may not actually be the NAV. Occasionally, closed-end mutual funds trade at a discount or premium to the actual Net Asset Value.Closed-end mutual funds are another way that investors can invest in a group of stocks and may be a good investment for you. Just be prepared to research them thoroughly, like you would for any stock or mutual fund.

 

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