Closed End Fund - Explained
What is a Closed-End Fund?
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Table of ContentsWhat is a Closed-End Fund?How Does a Closed-End Investment Fund Work?Academic Research on Closed-End Investment Fund
What is a Closed-End Fund?
A closed-end fund is a type of investment fund with a predetermined unit capital and total number of shares. This type of fund has an established duration with no option for investors to redeem shares from the fund. Returns are paid based on conditions stipulated in the investment agreement.
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How Does a Closed-End Investment Fund Work?
A closed-end fund is an investment fund that consists of a fixed unit capital as well as the total number of shares that cannot be altered, unless explicitly permitted by the fund management regulations. Closed-end funds have set durations and typically, do not provide investors with options to subscribe or redeem shares from their funds. This type of investment fund does not grant investors with the authority to exercise a redemption option against any asset belonging to the fund. Nevertheless, the investor is free to realize his subscribed units of the fund once they are liquidated at the end of their term. Closed-end investment funds are similar to Exchange-Traded Funds (ETFs) in that they consist of a restricted number of shares and are preliminarily launched to the public via initial public offerings (IPOs). After the fund manages to raise sufficient capital by way of the IPO, it makes its way into the open market where basic economic forces like supply and demand determine the price of the fund. However, unlike ETFs, closed-end funds are usually actively managed and can be traded at premium or discounted prices compared to the value of their holdings. Open and closed-end funds are two of the oldest types of funds, with the former being extremely popular among individual investors. Open-end funds are accessible via popular forms of pension funds such as provident funds and employer-sponsored defined benefit plans. Also, open funds practically open the doors of the stock markets to the investor and provide convenient options for him to participate in the markets at a time of his choosing. On the other hand, closed-end funds are pegged to the market price and mandate the use of the services of a broker for a buy or sell order. Another advantage of an open fund over a closed-end fund is that the former is a much safer investment since it usually offers greater liquidity. On the other hand, closed-end funds are governed by strict operational deadlines, a characteristic that often proves beneficial for investors that have tied their investments (and consequently, their profits) to fixed timeframes.