Why are some mutual funds closed?

It would seem to me that, if your fund was doing well, it would appear attractive, therefore drawing more investors, therefore making the fund rise in value.


So, why are they closed?

Do you mean why some mutual funds don’t accept new investors or why there is a type of mutual fund called a closed mutual fund?

A “closed mutual fund” has a collection of assets like a regular mutual fund but it is traded like a stock and anyone can buy shares on a stock exchange. Yeah, I am not sure why you would do something like that either but someone thought it was a nifty idea. Closed mutual funds often trade lower than the sum total of the investments that make it up but that may not be an advantage if the fund itself is the thing that is being traded.

If you are asking why some mutual funds may not accept new investors, it is because some investment managers are only comfortable managing a certain range of money. Once it gets past a certain point, it changes the nature of the game and they may not be as nimble with the investments as they were. Those types of mutual funds are just a collection of stocks and maybe some other types of investments and having more people in the mutual fund wouldn’t affect the value of the underlying assets except maybe in the tinniest ways.

Yeah, I was thinking about your second example. It just seems counterintuitive that more money wouldn’t be better since it would be a larger influence, but I guess I can understand why an asset manager might not want, or need, any further money invested in the fund.

Still, it seems odd.

It’s late and I’m not going to look up these facts, but I beleive them to be correct.

Until the securities regulation of the 30s the only type of fund allowed were what we now call closed-end funds. Some are presumably still in existence.

Funds that are set up nowadays as closed end often hold illiquid assets. Open-end funds are required to redeem your sahres (essentially) on demand at net asset value. This leads to two problems with illiquid assets. It is more difficult to determine in a verifiable way what a fair asset value is. If assets have to be sold to acquire cash to pay off redeeming shares, they may have to be sold at distressed prices.

It’s an oddity of the investment world, but some funds become so large - with so much money, that they are hamstrung in the sense that they cannot maintain their asset allocation without causing problems, they would end up owning whole sectors or corporations lock, stock and barrel. Incidentally, this is one advantage, sort of, that the small individual investor has over say, Warren Buffet. Hm.

That’s what happened with Fidelity’s huge Magellan fund several years back. They had so much money to invest that it was getting difficult to find investments that would maintain its historically high rate of return (which, no doubt, is why it became so popular). So they closed it to new investors.

Another way to look at it:

Let’s say you have a $100K portfolio, with about 1% invested in Symantec - SYMC. Should you decide it’s time to sell, and wish to unload your 50 shares, it won’t even be a blip on the radar. If a $10 billion fund has a similar position, they have 5,000,000 shares. That’s a huge block of shares, which they cannot just dump without causing a ripple (SYMC’s avg. volume is about 17,000,000/day). If we’re talking about a smaller growth issue, a large fund with a significant stake could have or wish to acquire days worth of the volume. They can’t buy or sell without seriously affecting the market unless they string their transactions out over weeks.

The big fund isn’t “nimble” in other words.

Oh, and many, many closed-end funds indeed exist. The currently popular “ETFs” are a form of closed end fund. You may start your research at either of these sites:


I like etfconnect, but their terminology is a little odd compared to many other sources. What most people call an “ETF”, they refer to as an “Index ETF”. What they call a “Closed end ETF” is what is usually just simply called a “closed end fund”. It makes much more sense, actually, but when you hear “ETF” most people mean an index fund.

ETFs (at least the one’s I’m familiar with) are only semi-closed. It is possible to redeem the ETF shares for payment in kind of the underlying assets. Even this is not permitted in true closed end funds.

Addendum - you will find a lot of pundits cautioning you that “Closed end funds ARE NOT etfs”. What they are getting at is the distinction between an actively managed fund and an index fund. A similar distinction exists between a normal mutual fund and an open-ended index fund. In terms of the mechanism for buying and selling shares, the ETF is “closed end”, although it is not actively managed.

My remark just crossed with OldGuy’s. I’m not trying to argue with him, as may appear to be the case.