What is a Closed Fund?

Closed funds are mutual funds that are not currently issuing shares to any new customers. There are a variety of reasons that this can happen, and there are also a variety of affects that this can have on investors. To understand the basics of closed funds let’s explore its dynamics.

Why Do Funds Close?

Mutual funds can evolve into closed funds for a number of reasons, but typically this occurs when the fund has grown too large. Usually, at this point, the fund’s manager will begin to question whether the fund is, or will soon become, too large to manage properly, which can negatively impact the current investment strategy. In the same vein, some managers may feel that larger growth might harm the fund’s performance integrity, which could cause harm to those investments that have already been made in the fund.

Once a fund has been closed, it may function with a few purchases that occur among the current shareholders, but often times, all action is suspended either temporarily or permanently.

How Do Closed Funds Affect the Market?

When mutual funds close, those shares that are already in circulation aren’t impacted. In fact, current investors usually will be able to continue purchasing shares as the come available. Those who are affected are only new customers wanting to get in. Unfortunately, they are now allowed to purchase any shares that are associated with a fund that the manager has shut down.

Can Closed Funds Reopen?

Mutual funds that have been shut down by the manager can be reopened; however, the decision to do so is strictly up to the manager. The main reason that that reopening occurs is that the manager decides that the reason for suspension is no longer valid. At this time, existing shareholders are able to acquire greater interest and new investors are also able to participate.

Closed funds can be a bit of a hassle for investors who were looking to make new investments, but by watching for updates from the fund’s manager, you may find in time that it will reopen to new customers once again.