Closed end funds are investment companies similar to mutual funds. They pool investor assets and invest that money in a diversified portfolio according to their investment objective. They invest in stocks, bonds and other asset classes like mutual funds.
While closed end funds are similar to mutual funds, there are some important differences. Closed end funds have relatively constant number of shares as opposed to mutual funds which continually issue new shares when investors are buying or redeem shares when investors are selling. In contrast, closed end funds issue shares in an initial public offering (IPO) and then those shares trade on an exchange (commonly the New York Stock Exchange).
This leads to another difference – a closed end fund’s shares trade throughout the day while a mutual fund transacts trades only once at the end of the day. The closed end fund’s price is determined by investor demand rather than its net asset value (NAV). The mutual fund’s price is its NAV. A closed end funds’ price is often at a premium or discount to its NAV.
Closed end funds often use leverage as part of their strategy. The funds borrow capital usually by issuing preferred shares. This additional money is invested with the original capital. The goal is to earn a return greater than the cost of the borrowed money which will benefit shareholders.
Closed end funds can regularly compliment investment portfolios. Kerr Financial Group helps clients include closed end funds to reach their financial goals.