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What are some important steps to take when considering investing in a closed-ended fund?

Before you invest in a closed-ended fund, you should consider what sector or type of closed-ended fund matches your investing goals. You may also see how the fund compares with similar funds by looking online at websites such as Upper and Morningstar, as well as industry reports from popular news organizations such as U.S. News & World Report and Money. The next step is to check the size of the discount or premium the fund is currently trading against its net asset value. If the fund is trading at a discount (as opposed to a premium), you stand a better chance of having good performance after you invest. You may see the fund's average one-year discount since its inception, and compare it to today's current discount. Even though it has been stated many times that one should never base a decision to invest solely upon a fund's past performance, it may indicate how well the fund may do in the future. It is a good idea also to review a potential fund's historical performance, to see how consistent it is, how it compares to other similar funds, and how it compares to various market indexes. According to experts at The Wall Street Journal, it is important to note the debt of a closed-ended fund, since more debt means the fund may be taking out loans to leverage its portfolio's investments, inherently making the fund riskier.

What are some other important considerations when evaluating closed-ended funds?

Like any mutual fund in which you are considering investing, you should consider the expense ratio of the fund, covering costs such as management fees and expenses related to trades. It is good to invest in funds with relatively lower fees, since these fees ultimately can depress the funds' gains. It is also important to note the yield of the funds, since closed-ended funds generate relatively more income than other types of funds, and the gains are taxable on investments in funds that are outside your retirement plans. Also, some experts suggest avoiding IPO closed-ended funds, as the discount between the initial offering and the net asset value typically becomes larger following the offering. It is also important to see how long a fund's management team has been in place. If a fund has had a great deal of turnover or change in its team, one may experience decreased returns as a result.

What percentage of closed-ended funds actually trade at a discount to their net asset value?

According to research experts at Upper, as reported in May 2013, 81% of all closed-ended funds traded at a discount to their net asset value, while 19% traded at a premium to their net asset value.

 
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