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What are Closed-End Income Funds?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 October 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Closed-end income funds are investment opportunities that allow investors to purchase non-redeemable shares that are backed with the securities currently held by these types of funds. This approach to collective investment can be an excellent approach, depending on the type and range of assets that are held by the individual fund. While closed-end funds share many characteristics with open-end income funds, there are a couple of key differences to consider.

One of the essential differences between close-end income funds and open-end income funds is the price paid by the investor to participate in the plan. With an open-end income fund, the investor will pay an amount that is equal to the current value of the shares issued by the fund. In contrast, the investor who wishes to participate in a closed-end income fund will pay a discounted rate for the shares. With this arrangement, the investor receives a higher return on that initial investment, assuming that the fund does generate interest payments consistently.

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Another important factor to consider is that closed-end income funds are normally structured so that the shares purchased are considered non-redeemable. This means that it is not generally possible to sell the shares back to the fund. Instead, the investor has the option of either holding onto the shares or selling them to another investor. As with many type of interest bearing investments, the new owner will normally begin to earn interest on the investment as soon as the sale is logged.

There are several factors to investigate before choosing to purchase any type of closed-end income funds. One has to do with the combination of assets that are owned by the fund. Ideally, any closed-end income funds under consideration will have at least a few premium bond issues as part of the holdings, while still maintaining a somewhat diversified collection of assets. In addition, it is a good idea to find out if the specific fund under consideration borrows money to purchase new bond issues for inclusion in the underlying assets. This will provide some clues regarding the long-term stability of the investment, and make it easier to decide if a given fund is the right fit for the investor.

Closed-end income funds are often an excellent option when it comes to planning for retirement, especially when the combination of assets and the general investing policies of the fund help to ensure a steady yield over time. Finding the right closed-end income funds can take some time and effort. Working with a financial planner will often make it easier to identify one or two funds that are right for the individual investor.

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