Closed-End Funds and Mutual Funds
Description
This article is from the A Guide to Closed-End Funds (CEFs).
Closed-End Funds and Mutual Funds
CEFs and Mutual Funds: Similarities
Most investors are familiar with mutual funds. CEFs are like mutual funds in many respects. Both are investment companies: they pool money from investors to buy securities. An investor buys into a fund by purchasing shares of the fund. His expectation is that the fund will perform well, and he will be able to sell his shares at a higher price, thereby, realizing a profit on his investment.
Common Advantages
For small investors, mutual funds and CEFs offer attractive benefits:
- Diversification.
- An important risk in investing in a single company is the possibility that the company goes bankrupt, and the shares held in that company become worthless. Most mutual funds eliminate this risk through diversification: they invest in many companies, industries, and markets. Even funds that invest in a particular sector of the economy are reasonably diversified within that sector. For individual investors, achieving similar diversification involves building a portfolio of stocks, and ensuring that they are not strongly interdependent. Many small investors lack the funds to achieve reasonable diversification.
- Professional Management.
- The funds are managed by portfolio managers, assisted by a team of analysts who research the companies, industries and markets in which the funds invest. Such managers, presumably, have years of experience and knowledge. Few individual investors can match the time and effort put in by professionals whose full-time job is to track their investments and seek new investments.
- Economy of Scale.
- The costs of buying and selling securities in large quantities is considerably less than in small quantities. In addition, bookkeeping, tax calculations and other activities can be simplified for the small investor.
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