Advantages of Closed End Funds

The advantages of closed end funds, according to the Closed End Fund Association, are:

Diversification

In closed end funds, you participate in a portfolio that invests in many securities, and this helps to spread market risk. If any one security performs poorly, it shouldn’t have a severe impact on your investment.

Professional Management

The portfolio manager or team selects securities and monitors them on a full-time basis. You can participate in closed end funds without developing investment expertise or devoting hours of time to research on specific issues.

Clear Objectives

Most closed end funds specialize in either stocks or fixed-income securities and pursue a consistent objective, such as capital appreciation or current income. Some funds are highly specialized, investing in a given region, country or specific type of security. You can select funds with management styles and objectives that match your needs.

Convenience

You may buy or sell shares quickly and easily during the day in any quantity that your brokerage firm permits.

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Liquidity

Whether your order is to buy or sell a few shares or several thousand, you should be able to execute your trade in active and competitive bidding.

Economy of Scale

The costs of operating a closed end fund are divided pro rata among all shareholders. The major ongoing cost, a management fee paid to the investment advisor, is based on assets and is very competitive with the same expense in mutual funds.

Periodic Distributions

Your fund will make distributions according to a prescribed schedule. If you depend on your investments for current income, this will allow you to plan the timing of income. (The actual amounts of income distributed by closed end funds varies with market conditions and fund performance.)

Pass Through Taxation

Like mutual funds, closed end funds generally do not pay tax at the fund level on amounts distributed to investors. The taxation is said to ‘pass through’ to the shareholders.

Available For Many Accounts

Like mutual funds, closed end funds may be purchased in regular brokerage accounts (individual or joint-name), retirement plan accounts, trust accounts or custodial accounts.

Closed end funds are a type of investment company that offers a fixed number of shares, which are traded on a stock exchange just like stocks. Assets are professionally managed in accordance with the fund’s investment objective and policies, and may be invested in equities, fixed income securities, or a combination of both. Like other publicly traded securities, the value of closed end fund shares fluctuates and is determined by supply and demand in the marketplace.