What Is a Closed Fund?
A closed fund is a fund that is either closed toinvestors (temporarily or permanently) or has ceased to exist. Funds can close for various reasons, butprimarily they close because the investment advisor has determined that the fund's asset base is getting too large to effectively execute its investing style. A fund can cease to exist if it fails to perform and investors withdraw their funds.
A closed mutual fund should not be confused with a closed-end fund, whichhas a fixed number of shares, generally invests in specialized sectors, and trades like a stock on a stock exchange.
Key Takeaways
- A closed fund is one that has stopped accepting new money from investors.
- A fund closed to new investments may be winding down and terminating, or else has reached some specified amount of assets that precludes it from taking in more money.
- Some investment strategies stop being profitable if the positions taken in them become too large.
- If the fund continues to operate, while it will not accept new client money, it will continue to manage its portfolio according to its mandate.
Understanding a Closed Fund
A closed fund may stop new investment either temporarily or permanently. Closed funds may allow no new investments or they may be closed only to new investors, allowing current investors to continue to buy more shares. Some funds may provide notice that they are liquidating or merging.
When a fund announces it is closing, it may be structured in various ways. The fund company can close to new investors only or stop allowing new investments from any investors.
If a fund plans to remain in operation, the fund will continue to manage operations normally. Existing investors have the advantage of owning shares and benefiting from further income and capital appreciation. Current investors are often given priority when a fund begins limiting its asset inflows. Thus it may reopen only to currentinvestors first before allowing additional investments again.
Special Considerations
In some cases, a fund may be liquidating following the announcement of a closing. If a fund is liquidating, the management investment company will sell all of the assets in the fund following a predetermined schedule. The fund company will then provide investors with the proceeds. Fund companies may also merge shares of a fund with another existing fund.
Fund companies will provide investors with notice of liquidation or merger. If the company distributes a payout to investors due to a fund closing, the investors will be liable for tax implications. Companies may provide investors with reinvestment options in other affiliated funds, which can avoid taxes for the investor.
Money managersmay close certain portfolio groups to new accounts (such as those with less than $10,000 to invest), while leaving others open to specific types of investors, such as institutional investors.
Factors Leading to a Closed Fund
If a company is liquidating or merging fund shares, it is typically due to a lack of demand. If inflows have been decreasing, or if demand for a new fund has not generated enough inflow to keep it active, then a fund company will take action to liquidate or merge the shares into a fund with a similar objective.
Sometimes, a fund may need to close because of asset bloat, which can occur from excessive inflows to a fund. This is most common when a fund invests in small-cap stocks or a small number of securities. With these funds, an excessive inflow of capital can significantly affect the market and the targeted stocks in the portfolio.
Funds that close due to asset bloat will usually be actively managed funds, since passive indexing strategies are immune to this issue.
Funds may need to close for other reasons, such as compliance with the 75-5-10 rule for diversified funds. The 75-5-10 rule is outlined in the Investment Company Act of 1940. The rule states that a fund can have no more than 5% of assets in any one company and no more than 10% ownership of any company's outstanding voting stock. Diversified funds must also have 75% of assets invested in other issuers and cash.
Overall, fund closings are on a case-by-case basis, and each fund will have its own individual reasons for closing. If a fund is only closing temporarily, then both current and potential fund investors can seek to understand the specific parameters of the closing and when it may be opening again.
FAQs
A closed fund is a fund that is either closed to investors (temporarily or permanently) or has ceased to exist. Funds can close for various reasons, but primarily they close because the investment advisor has determined that the fund's asset base is getting too large to effectively execute its investing style.
What does a closed mutual fund mean? ›
A closed-end fund is a type of mutual fund that issues a fixed number of shares through one initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
What happens when a mutual fund is closed? ›
If a mutual fund scheme winds up or closes, the assets of the scheme are liquidated. Following this, the proceeds are distributed to the unit holders in proportion to their holdings, based on the prevailing Net Asset Value (NAV) after deducting the relevant expenses.
Is it good to invest in closed-end mutual fund? ›
Most are seeking solid returns on their investments through the traditional means of capital gains, price appreciation and income potential. The wide variety of closed-end funds on offer and the fact that they are all actively managed (unlike open-ended funds) make closed-end funds an investment worth considering.
What are the advantages of a closed fund? ›
Following the IPO, a CEF's shares trade in the secondary market on a stock exchange and are usually not subject to redemptions by the shareholder. This means that portfolio managers can keep the fund fully invested and do not have to keep cash on hand to meet redemptions like they would in a open-end mutual fund.
Why are some mutual funds closed? ›
The biggest reason why a mutual fund company will decide to close its fund's doors is that the fund's strategy is being threatened by the fund's size. The decision to close a fund's doors to new investors could be to protect existing shareholders from stagnant or declining fund performance.
What are the risks of a closed-end mutual fund? ›
Valuation Risk: The market price of a CEF at any point in time is likely to vary from the fund's NAV. The size of any price premium and/or discount could have a significant impact on an investor's return over time.
Can closed ended mutual funds lose value? ›
Inherent in all closed-end bond funds are market risk and credit risk. Market risk involves the potential impact of increasing interest rates, which could lead to a decrease in the value of the fund's bond holdings.
Can mutual fund be closed anytime? ›
Can One Withdraw Mutual Funds Anytime? Investments in open-end schemes are redeemable at any time. However, investments in the Equity Linked Savings Scheme (ELSS) carry some restrictions, as they come with a three-year lock-in period from the investment date.
How do you know if a mutual fund is closed end? ›
A closed-end fund has a fixed number of shares offered by an investment company through an initial public offering. Open-end funds (which most of us think of when we think mutual funds) are offered through a fund company that sells shares directly to investors.
The higher risk involved with investing in illiquid securities could translate into higher returns to shareholders. Second, regulators allow the funds to issue debt and preferred shares, with strict limits on leverage. The fund can issue debt in an amount up to 50% of its net assets.
Can you make money with closed-end funds? ›
Depending on a closed-end fund's underlying holdings, its distributions can include interest income, dividends, capital gains or a combination of these types of payments. In some cases, distributions also include a return of principal, sometimes referred to as a return of capital.
Can I sell close ended mutual fund? ›
In case of closed-end mutual funds, shares of the mutual fund may not be sold and bought at the NAV price. As the closed-end fund is traded in a stock exchange (e.g. NEPSE), the traded value of the mutual fund usually differs from the NAV calculated by the mutual fund company.
Why don t more people invest in closed-end funds? ›
The CEF universe is a small one when compared to that of open-end funds (mutual funds) and so it is ignored by most investment managers. Accurate, current information about CEFs is less readily available, requiring more research and analysis than open end funds or equities.
How do closed-end funds make money? ›
A closed-end fund, or CEF, is an investment company that is managed by an investment firm. Closed-end funds raise a certain amount of money through an initial public offering, or IPO, after which it can list shares on a stock exchange. Like mutual funds and ETFs, closed-end funds invest in a basket of securities.
Are closed-end funds good for retirement? ›
CEFs can allow you to create the paycheck you need to live your best life in retirement, but what are the risks? Long-term CEF investing. Closed-End Funds utilize leverage (loans) to increase their returns. Leverage makes good returns great and bad returns horrible.
What is the difference between open and closed mutual funds? ›
The big difference between open ended and closed ended mutual funds is that open-ended funds always offer high liquidity compared to close ended funds where liquidity is available only after the specified lock-in period or at the fund maturity.
What is the difference between open fund and closed fund? ›
A closed-end fund has a fixed number of shares offered by an investment company through an initial public offering. Open-end funds (which most of us think of when we think mutual funds) are offered through a fund company that sells shares directly to investors.
What is the difference between open and closed ended mutual funds? ›
Open-ended funds offer flexibility of investing through lump-sum investments and Systematic Investment Plans (SIPs). Investors can make multiple purchases in the fund at their discretion. Closed-ended funds permit investment solely during the NFO period and do not accept investments through SIPs.
