One of three types of Investment Company is the closed-end company, which is also known as the closed-end fund. The other two types are the hugely popular mutual funds and a little less popular Unit Investment Trusts. In this article we will deal with closed end funds and what exactly do they mean to a common investor:

A closed end fund is usually set up to raise capital. But unlike an open end fund, a closed end fund is used to raise a fixed amount of capital through the route of an IPO. Once the capital is raised from an IPO the said stocks are traded in a stock exchange (or OTC). Hence for a closed end fund there will be a limit to the number of stocks been traded. Whereas for an open ended fund, the stocks are traded in unlimited numbers.

Closed end funds are also referred to as closed end mutual funds. This does not mean a closed end fund is similar to a mutual fund. A normal mutual fund is in fact an open-end fund. Closed end funds usually behave like a normal stock and trade as usual, their price been dependent upon market supply and demand of the stock. Here the stocks are part of a portfolio which is related to some specific industry or sector.

The expense associated with managing a close end fund is very similar to that of a common stock. Apart from this, there will be usually fees for managing the fund by professional fund managers. Another expense area is the bid ask spread associated, i.e. cost of buying and selling a closed end fund is not the same. For a closed end fund the Net Asset Value is different from the price of the fund. Usually a closed end fund is traded at a discount from their net asset value.

What is the need for opting for closed end funds by a company? Well, the reasons can be many. For example the need to hold securities or stocks which cannot be easily traded in a stock exchange can lead a company to have a closed end fund structure. Usually for a mutual fund an investor can decide when to sell his stock from the fund and the fund manager has to comply with the order.

But with a closed end fund, the manager doesn’t have to sell any stock even if the investor wants to sell his stocks. Mutual funds, where as are open ended, as the fund manager can grow his fund by adding new investors and investments. They are not traded in stock exchanges or OTC market. And their price is based on the underlying’s asset value only.

But like a mutual fund, a closed end fund is regulated by SEC and consists of a diversified portfolio which is managed by a fund manager who is required to distribute dividends to the stock holders. Municipal bonds are example of a closed end fund. Best picks for a closed end fund include those from Nuveen, Neuberger Berman Intermediate Municipal Fund, and Western Asset Managed Muni Fund etc.