Pricing

When buying or selling either an open-end or closed-end fund, an investor usually knows the current value of the fund’s assets per share (NAV).

For example, to buy an open-end fund with a NAV of $15, an investor pays $15 per share. The fund simply issues new shares to the investor at the current NAV. The assets the fund manages have increased, but the value per share remains the same because the new shares have exactly the same value as the other shares. If the investor sells, he or she is paid the NAV. The amount of assets the fund manages has been reduced, but the NAV of outstanding shares has not changed because the shares redeemed were equal in value to all others.

With closed-end funds, the shares are traded in the open market and are consequently subject to demand/supply imbalances. They may trade at a price greater than their NAV (termed a premium) or at a price below the NAV (termed a discount). Read the rest of this entry »