What is the most important characteristic of a close-ended mutual fund?

What is the most important characteristic of a close-ended mutual fund?

• A. It can issue continuous shares
• B. It has a limited offering of shares
• C. It is only available for a limited time
• D. It offers tax-free distributions

Answer: (B)

A close-ended mutual fund is distinctive primarily because it has a limited offering of shares. Once the shares are issued during an initial public offering (IPO), no new shares are created. This means that the number of shares remains constant and does not fluctuate based on investor demand. Instead, investors buy and sell shares on the secondary market, much like how stocks operate, potentially leading to a market price that differs from the fund's net asset value (NAV). The limited nature of the shares allows for potentially greater price volatility, as supply and demand dynamics take hold after the initial issuance. This characteristic is fundamental to understanding how close-ended funds operate compared to open-ended funds, which continuously issue and redeem shares based on investor activity.

A close-ended mutual fund is distinctive primarily because it has a limited offering of shares. Once the shares are issued during an initial public offering (IPO), no new shares are created. This means that the number of shares remains constant and does not fluctuate based on investor demand. Instead, investors buy and sell shares on the secondary market, much like how stocks operate, potentially leading to a market price that differs from the fund's net asset value (NAV). The limited nature of the shares allows for potentially greater price volatility, as supply and demand dynamics take hold after the initial issuance. This characteristic is fundamental to understanding how close-ended funds operate compared to open-ended funds, which continuously issue and redeem shares based on investor activity.