A closed fund is an open-end mutual fund that has suspended the sales of shares to new customers – either temporarily or permanently – typically because asset growth has been significantly higher than normal. A mutual fund is a company that pools money from many investors and invests it in securities.
In some cases, existing shareholders may buy shares, while outstanding shares are still accepted for redemption by the fund.
Sometimes even current shareholders are also precluded from making further investments.
A closed fund is when the sales of shares to new customers have been suspended. It may occur if the fund manager is concerned that by increasing the asset base too much, his or her current investment strategy will become to difficult to achieve.
Fund managers close the fund to new investors mainly because of concern that if they raise the asset base of the fund further, their current investment strategy will become too hard to achieve.
In other words, the fund managers feel that there are too many investors and/or assets in the fund to generate the kind of investment return they had originally foreseen.
Do not confuse a closed fund with a closed-end fund, which generally invests in specialized sectors and has a fixed number of shares. A closed-end fund is structured and listed as a stock on a stock exchange.
Closed fund might reopen
Mutual funds that have closed to new investors can sometimes reopen. Fund managers may close a fund to new investors for one of several reasons, or a combination of them.
As mentioned above, a fund may become so big in assets that the portfolio becomes virtually impossible to manage. Large investment positions in individual stocks can be difficult to buy or sell without affecting the securities’ prices.
Consequently, portfolio managers of extremely large funds lose flexibility because they are mostly limited to holding onto the stocks of large companies with massive numbers of shares outstanding.
In the same way, a mutual fund that specializes in investments of a specific, narrow market segment may not have a wide range of investment options.
A fund that focuses on investing in businesses from emerging economies or small-capitalization firms, for example, probably faces limited share availability. Investors may channel such huge amounts of money into a successful mutual fund that the portfolio manager cannot invest it all.
Bull and bear markets
Mutual funds most commonly close following asset growth during a long bull market – a long period of rising stock prices. According to The Free Dictionary, Janus Capital closed seven of its twenty-one funds over a 24-month period starting in the middle of 1998, including the popular Janus Fund which had grown to $52 billion in assets.
If the fund size shrinks it may subsequently reopen. If the portfolio manager believes that new investment opportunities have become available, he or she may open the fund to new investors again.
Funds are more likely to reopen following a long bear market – when prices are in decline – during which the size of the fund can shrink.
According to nasdaq.com, a closed fund is:
“A mutual fund that is no longer issuing shares, mainly because it has grown too large.”