CLOSED-END INVESTMENT FUND
Most people will find that their
investment objectives change throughout their lives. Capital appreciation may
be more important for the young investor, but once she enters her golden years,
that same investor may place a greater emphasis on gaining income. Whatever
your objective, knowing what investment options are out there is key.
Furthermore, as most successful
investors will tell you, diversification is king. A diversified portfolio not
only reduces unwanted risk, but also contributes to a winning portfolio. And
having a well-diversified portfolio doesn't necessarily mean just buying more
than one stock; branching out into other areas of investment could be a viable
alternative.
What Is It?
A closed-end fund is an investment
fund that issues a fixed number of shares in an actively managed portfolio of
securities. The shares are traded in the market just like stocks, but because
closed-end funds represent a portfolio of securities they are very similar to a
mutual fund. Unlike a mutual fund, the market price of the shares is determined
by supply and demand and not by net asset value.
Closed-end funds are usually
specialized in their investment focus. For example, one might concentrate its
focus on a particular geographic region. They invest in stocks, bonds and other
securities to gain a bit of diversification, but because they focus on one
region or industry they are not diversified to the overall market. There are
several hundred different closed-end funds actively traded on North American
stock markets.
There are also "dual
purpose" closed-end funds, which simply means that they have two classes
of shareholders: preferred shareholders who receive mainly dividends as income,
and common shareholders who profit from the capital appreciation of the fund's
share price.
Objectives and Risks
Objectives can vary from fund to
fund, so it is important to read the prospectus before investing. (To learn
more, see Don't Forget To Read The Prospectus!) Some closed-end funds have capital
appreciation as their primary concern, while others are more interested in
income.
How to Buy or Sell It
Closed-end funds can be bought on
various stock markets with the assistance of a full service or discount broker.
There is no minimum number of shares to buy, and selling the funds is very easy
and quick. When purchasing a closed-end fund, you are typically charged the
usual brokerage commission as well as an annual management fee, usually under 1%.
Strengths
These funds are easy to buy and sell
on financial markets. Furthermore, they are regulated by the Securities and
Exchange Commission.
The funds usually invest in hundreds
of companies, so they offer good diversification in certain areas.
If bought in a tax-deferred account,
closed-end funds are a great investment for long-term capital appreciation.
Weaknesses
Fixed interest payments are taxed at
the same rate as income.
The price of the closed-end fund is
not exclusively linked to the performance of the securities held by the fund.
The fund\'s share price depends on supply and demand in the open market.
Three Main Uses
Capital Appreciation
Income
Safe Tax Deferred Investment
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