Closed End Funds or CEFs

Closed End Funds of CEFs are collective investment instruments which, in many ways, are similar to mutual funds; in fact may consider them as first type of mutual funds. Like mutual funds, CEFs are professionally managed, diversified funds which buy and hold stock and/or bonds and issues their shares to trade publicly. But there are some key differences,

1. Rather than continuously offering shares, closed end funds sell a definite number of shares at one time (through initial public offer). After this the fund is publicly traded on a secondary market (NYSE, Nasdaq, etc.) just like stock.
2. In secondary market, the price of shares is determined by demand and supply and is not usually equal to the underlying value of shares. And the difference in price is called discount (if -ve) or premium (if +ve).
3. Usually there is no share redemption. That is, the CEF firm does not buys-back the shares they sold. But some funds repurchase their shares at specific intervals and these funds are known as interval funds.
4. CEFs are permitted to invest more in illiquid instruments than normal mutual funds. Thus they can be more risky and at times can offer better returns.
5. CEFs usually have low expense ratios than mutual funds as they can save the costs associated with creating and redeeming shares.
6. Many classify CEFs to two different categories as Closed end stock funds (stocks form the majority of CEF portfolio) and Closed end bond funds (bonds form the majority of CEF portfolio).

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