Closed-End Funds

Definition of Closed-End Funds

A close-end fund is an investment that is traded publicly so that a fixed amount of capital is raised only with the help of (IPO) initial public offering. This fund collected is listed, structured and then traded like stocks, like a stock exchange.

What are Closed-End Funds?

Closed end funds are quite often mistaken to be mutual funds. A very basic difference is that close-end funds are more like stocks - which means that the market is driven by demand and supply when regard to shares. While when it comes to open-end mutual fund, it doesn’t trade on an exchange but issues new shares to people who invest in it.

Comparison between Close-End Mutual Funds and Open-End Mutual Funds  

Since many times close-end funds are mixed with mutual funds, here is a comparison that would help you to understand this term better.

Open-End Mutual Funds-

When we talk about mutual funds, it is ‘’open-ended’’ because of the free flow of cash which is always there. This means a manager known as the portfolio manager takes cash from the investor and invests, therefore giving new shares to new investors.

Close-End Mutual Funds-

Now when it comes to close-end mutual funds, it means that the cash flow is not very smooth. The flow of cash in and out is closed. The portfolio manager invests a calculated amount of cash that was initially raised in public fund share. If a person wants to buy shares of the fund, they have to be bought through a stock exchange which is only through another investor. The number of funds remains fixed and doesn’t get affected by investors.

After knowing a few differences between Open-Ended Mutual Funds and Close-Ended Mutual Funds, it’s also good to know on what basis is Close-End Funds similar to Mutual Funds.

Similarities in Close-End Funds and Mutual Funds

  • Both these i.e., the close-end funds and mutual funds are handled and managed by a professional investment advisor.
  • Mutual funds and close-end funds are passively or actively managed.
  • In both these funds, it is important to distribute dividends and capital gains to shareholder.
  • Close-end funds and mutual funds are regulated by the Exchange Commission and the U.S Securities.
  • Both include bonds, stocks or have a combination of both.

Along with knowing the comparisons and similarities, one also needs to know what makes them so different from each other.

Differences in Mutual Funds and Close-End Funds

  • Close-end funds are traded over the counter or on a stock exchange.
  • Close-end funds are flexible to an extent that they can be bought and sold anytime during the trading day.
  • The close-end funds are purchased and sold at whatever the price is in the market but this is against the underlying security value.
  • Close-end funds are completely driven by the demand and supply of funds in the market.
  • These funds can also be used in leverage, which means that cash can be borrowed to be invested in buying of more assests so that the returns can be exchanged.