Introduction
A closed-end fund (CEF) is a mutual fund which works quite differently from the conventional open-end mutual fund that is more widely known. A closed-end funds is a pool of asset managed by the issuing investment company just like any other mutual fund. However it differs from the open-end mutual funds in substantial ways. In terms of behavior it seems to have more in common with stocks than open-end mutual funds.
A closed-end fund issues shares through initial public offering (IPO) like a company. They issue a set number of shares unlike open-end funds, and these shares are then tradable in the stock exchanges. Therefore the price of a fund is determined by its market demand just the way the price of company stocks are determined. These are the two ways that closed-end funds are different from open-end ones since open-end funds have no limit to the number of shares that will be issued and the price of the fund is not determined through investor demand. In case of the former shares are issued whenever investors put in money into the fund and redeemed when investors take money out of the fund. In case of the latter, the price of the fund is simply determined by the changes in the prices of the stocks and bonds that the fund owns, so in other words, the price of an open-end fund is its net asset value (NAV).
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