Closed End Mutual Funds Dont Get Confused

Unlike a traditional mutual funds, closed end mutual funds have little in common to the traditional open end fund. In fact, they defer significantly. As an investor r, you should learn the differences prior to investing in such funds so as to make an informed investment decision. Characteristics Through an initial public offering or IPO, closed end funds raise capital by issuing a limited amount of shares to the public. Once the funds have been raised the shares of such mutual funds are traded in the stock market.

The traditional fund issues and redeems shares on demand, thus meaning there is no limit. On the other hand, a closed end fund issues a limited amount of shares. The shares of a closed end fund trades in the stock market based on the supply and demand of the shares. In a traditional fund, the shares are purchased directly from the mutual fund company.

In an open-ended fund, the asset of the fund grows or shrink based on the inflow or outflow of money. This is not the case in a closed end mutual funds. That is, the fund grows or shrinks based on the demand for the fund. In the traditional fund the price of the share is determined based on the net asset value held in the fund. The share price of the closed end fund is determined based on the demand investors place in the stock market. Be Cautious We recommend the novice investor stay away from closed end mutual funds, simply because the mechanics of such funds are much more complex than the traditional mutual fund.

More important, although the fund is diversified as in the traditional open fund, investor demands greatly affect the value of this fund. That is, such funds are subject to the same risks that shares face in any stock market. Specifically, most of these funds are selling at a discount in the stock market. As a result, investors who buy closed end mutual funds are trying to capitalize the gap shrinking between the discounted price and the net asset value. This can only mean investors are speculating, and speculation is risky.

Before you invest in mutual funds, make sure you check John Caldwell's excellent free articles on mutual funds basics.