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And while CEFs are commonly misunderstood, they can offer a lot to the right investor.
Understanding Closed-End Funds
What Is a Closed-End Fund?
Closed-end funds are mutual fund-like investments that trade on the stock exchange.
After that, no investor money flows into or out of the fund.
The only way to acquire shares is to buy or sell them with other investors in the open market.
Open-end funds are different in that they continually offer shares to investors who wish to purchase them.
Exchange-traded fundsare something of a hybrid between CEFs and traditional, open-end mutual funds.
Its share price will fluctuate in line with supply and demand, just as with any companys stock.
They are neither purchased from nor redeemed with themutual fundcompany itself.
Types of Closed-End Funds
Equity CEFs
Equity CEFs focus on stocks.
Bond CEFs
Bond CEFs have an emphasis on fixed-income securities.
First, understand how CEFs operate in general, in terms of their net asset values and market prices.
Then, look at a funds investment objectives and track record.
you might buy or sell CEFs on any major brokerage platform.
In most cases, this is an undesirable situation.
The expense ratio refers to how much it costs to own a CEF.
The expense ratio covers everything from administrative expenses to manager salaries.
The bigger the expense ratio, the more money thats taken out of the funds profits.
All of these factors can significantly boost the income they pay out vs. traditional mutual funds.
However, the same factors that can enhance CEFs income-paying ability can also make them riskier.
Unlike bonds, CEFs have no maturity date, so there is no guarantee of a return of principal.
This makes CEFs best suited for income investors with a long-term perspective and a higher tolerance for risk.
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