Closed-End Funds 

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Closed-End Funds



Investment Snapshot

* According to the Investment Company Institute (www.ici.org), closed-end funds had a total of $285.8 billion invested as of September 2006.
* For the third quarter of 2006, there were 196 closed-end stock funds.
* Shares of closed-end funds are traded on the stock exchanges.
* Shares of closed-end funds can trade at a discount or a premium to their net asset values.

A closed-end fund issues a fixed number of shares, and when all the shares issued are sold, no more are issued. In other words, closed-end funds have fixed capital structures. Investors who want to invest in closed-end funds after all the shares are sold (for the first time) have to buy them from shareholders who are willing to sell them in the market. Shares of closed-end funds are listed on stock exchanges and over-the-counter (OTC) markets, whereas shares of open-end mutual funds are bought from and sold to the investment company sponsoring the fund. As a result, share prices of closed-end funds are a function not only of their net asset values but also of the supply of and demand for the stock in the market.

A unit investment trust (UIT) is another type of closed-end fund. A unit investment trust issues a fixed number of shares, which are sold originally by the sponsor of the trust. The proceeds from the sale are used to buy stocks or bonds for the trust, which are held to maturity. Unlike an open-end or closed-end fund, no active trading of the securities in the portfolio takes place. Consequently, no active management of the trust takes place, which should translate into lower management fees, although this is not always the case. A trust has a maturity date, and the proceeds are then returned to the shareholders of the trust.
Closed-End Funds Open-End Funds
1. Issue a fixed number of shares, which are sold to original shareholders.
2. Shares (after issue) are traded on the stock exchanges.
3. Shares may trade at, above, or below net asset value.
4. Share prices depend not only on the fundamentals but also on the supply of and demand for the shares.
5. Closed-end funds do not mature; UITs do.
1. Issue an unlimited number of shares.
2. Shares (including new shares) may be bought (and sold) from (and to) the fund.
3. Shares trade at net asset value.
4. Share prices depend on the fundamentals of the assets in the fund.
5. Open-end funds do not mature except for zero-coupon funds

All UITs charge sales commissions, whereas investors in open-end funds have a choice between the purchase of a fund that does or does not charge a sales commission. Table 15–1 illustrates the differences between open-end and closed-end funds.

KEY CONCEPTS
* What closed-end funds are and how they work
* The different types of closed-end funds, unit investment trusts, and real estate investment trusts
* The different sources of risk of closed-end funds
* Times when it is advantageous to invest in individual securities or to use mutual funds or closed-end funds




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