Generally, they're no riskier than their cousins, open-ended mutual funds. Closed end funds issue a set number of shares at the fund’s origin that trade on the stock exchange throughout the day. The value of these shares is based on demand. If lots of investors buy shares, the price goes up. If investors dump them, the price goes down. Cllosed end funds trade on a stock exchange like a stock. That's different than an open ended fund where the fund company is constantly issuing new shares. The price per share is referred to as the net asset value (NAV) — is calculated by dividing the market value of the fund’s assets by the number of shares held by investors. The NAV is calculated once per day after all of the assets held by the fund have finished trading.
Closed end funds also have a NAV, which can be different than the share price. If you invest in a closed-end fund with a share price that’s lower than its NAV, you’re getting a discount. If the gap between that fund’s share price and its NAV narrows after you invest, you’ll receive a bonus when you sell shares. That said, a lot of closed-end funds trade with a discount compared to the NAV. The key is knowing how how much of a discount they’re offering and whether you think the fund will perform well over time. If it does, and the discount shrinks after you’ve purchased shares, then you earn a profit.
Like open-end funds, closed-end funds have multiple varieties of investment strategies, from U.S. stock and bond funds to funds that invest in a singe country or region. Closed-end funds tend to be actively managed — meaning the fund’s manager buys and sells securities in an effort to outperform the fund’s benchmark index, such as the S&P 500 Index. This buying and selling could result in higher fees and increased taxes, if you hold the fund in a taxable account.
The overall risk of a closed end fund is based on its investment strategy and the objectives of the fund. A fund that invests in a blend of stocks and bonds will likley be more risky than a fund that invests in micro-cap stocks. Also, how the fund manager invests could increase the risk, so be sure to read any fund fact sheets and their quarterly/annual reports to understand how they structure their investments.
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