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Closed-End Funds

Closed-End Funds

The three basic types of investment companies regulated under the Investment Company Act of 1940 are closed-end funds, mutual funds, and unit investment trusts. Closed-end funds must be registered with the Securities and Exchange Commission. Such funds are regulated under the Investment Company Act of 1940 and are subject to the Securities Act of 1933 and the Securities Exchange Act of 1934. Regulations have been issued by the Securities and Exchange Commission to govern the operation of closed-end funds.

Closed-end funds present investors with various options because such funds may have different investment objectives and strategies and may maintain fund investments in both liquid and illiquid securities. Such funds may direct their investments toward a particular country or a particular line of business.

Closed-end funds have characteristics that distinguish them from other types of investment companies. Generally, a closed-end fund registers and sells a fixed number of shares in the fund at one time. After that initial public offering is made, shares in the closed-end fund are traded on a secondary market such as the New York or American Stock Exchanges or Nasdaq. While investors may trade shares of a closed-end fund, the closed-end fund, unlike the traditional mutual fund, is not required to redeem or buy back its shares.

The price of shares in closed-end funds is determined through trading on the secondary market. Normally, the price of a share of the fund may be expected to approximate the value of a corresponding portion of the value of assets held by the fund. However, the price of a closed-end fund share may be greater or less than the net asset value of a share of the fund or greater or less than the proportionate value of the investments held by the fund less the fund’s liabilities.

Unlike shares of mutual funds, shares of a closed-end fund are not required to be redeemable. Thus, a closed-end fund is not required to buy back its shares from investors in the manner that a mutual fund would redeem its shares. However, there are closed-end funds known also as interval funds that will repurchase shares at specific intervals.

Closed-end funds are managed by investment advisers. Those investment advisers in turn must be registered with the Securities and Exchange Commission. In contrast to mutual funds, closed-end funds may be more likely to invest in illiquid securities that are not easily disposed of within a seven-day period at the price that the securities are valued in determining the fund’s net asset value. Unlike a mutual fund, closed-end funds do not have a redemption requirement to force them to maintain liquid investments that remain available for redemptions.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

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