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Just what is a closed end fund anyway? Add to ...

Dear Nancy Woods,

I have been looking on GlobeandMail.com because I know very little about the stock market or investing. I have been reading the summary pages for common stocks and mutual funds and under the fund facts portion of the summary page some of the mutual funds say "closed." What does that mean and why do fund managers close a fund? Do you purchase them through a broker, and then monitor them and try to anticipate when the companies will wind up - or do you purchase them, and hang on to them like a mutual fund? Jarry

Dear Jarry,

Closed end funds are different than the typical mutual fund that you think of. The word closed doesn’t mean that you can’t buy them. It means that the pool of money that goes into it is fixed or closed to new funds. The amount of the initial capital raised by the initial public offering (IPO) is represented by a fixed number of shares. The shares trade on the stock exchange. This can be an advantage because you will buy or sell the shares at the current trading price intra-day rather than getting the price at the end of day.

A major difference is that the price is determined entirely by the market value reflected in the trading price. What that means is that the market price can be higher or lower than the net asset value (NAV).

Managing the money in a closed end fund is easier for the manager. They can be fully invested at all times if they choose because they do not have to make allowances for liquidity to cover redemptions or find investments for new purchases.

Because closed end funds trade on an exchange you can only purchase them from a brokerage that can trade equity stocks. That can be through a discount brokerage or full-service. They cannot be sold to you by a mutual salesperson.

Depending on the type of closed end fund and the mandate of the fund, treat it as you would an equity mutual fund. There are many varieties of fund types available. Some are equity, equity income, balanced, fixed income, commodities and international funds.

In some regards, closed end funds are similar to exchanged traded funds (ETFs) except for the fact that there is active management of the fund portfolio.

Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com


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