What’s a closed fund?

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Closed-end funds are mutual funds that issue only a limited number of shares for public trading. The trading price of a mutual fund set up as a closed-end fund is often influenced by the supply and demand for the shares outstanding. This is in contrast to other mutual funds that tend to trade based on the net asset value of the underlying security. The terms of the fund are generally announced at the time of the initial public offering.

Because the price associated with a closed-end fund is primarily determined by the market price, competition for these types of funds can get quite fierce. The additional incentive has to do with the limited availability of shares. Since only a limited number of shares are available for public trading at any given time, investors who find closed-ended diversion highly desirable can actively compete to secure shares. This will often drive up the market price that the shares can command.

Understanding the performance of a closed-end fund is key to determining whether it’s a good idea to try to insure stocks. When share prices are consistently above the NAV of the underlying, the fund is understood to be trading at a premium. If market indicators predict that the market price will continue to rise, the purchase of the shares is recommended.

At the same time, if the shares sell for below net asset value, the fund is said to be trading at a discount. Before deciding to assume that the discounted price is worth taking advantage of, the investor should take a closer look at the closed-end fund. If there are signs that the stock will soon begin to command a price that is above net asset value, then buying the stock now is a good move. On the other hand, if the shares involved in the closed-end fund are not anticipated to increase in market value within an acceptable period of time, the investor may look elsewhere for opportunities.

Smart Asset.

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