What is a Closed Fund?

by Investing School on October 18, 2010

A “closed fund” refers to a mutual fund that has suspended its sale of shares to new clients, whether the suspension is temporary or permanent. This will often be the result of especially rapid asset growth.

However, in many cases the closed fund may still accept outstanding shares for redemption, and in most situations it may still sell shares to existing shareholders, but the fund will no longer issue shares to new shareholders. The main reason that a fund will close off the sale of shares to outside investors is because the fund managers may become worried that by continuing to further grow the asset base of the fund, the overall investment strategy could become increasingly difficult to realize.

This reality demonstrates a fact that it is entirely possible for a mutual fund to have too many investors and too many assets, which will then not allow the generation of returns that are in alignment with its plans for the fund. This is why closing a fund can make sense, even when there are plenty more people who are interested in purchasing shares. In fact, in some situations, a closed fund may actually stipulate that even its current investors will be prevented from the purchase of additional shares from the fund, but this is not usually the case.

Note that a “closed fund” should not be confused with a “closed-end fund,” which is a completely different concept.

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