Features and Benefits of Closed-End Funds

Closed-end funds offer many of the same benefits as open-end mutual funds, including professional management, portfolio diversification, and liquidity. But, because of certain distinguishing features, closed-end funds offer investors other, distinct opportunities as well. Below we outline some of the key features and benefits of closed-end funds.

Features of Closed-end Funds

Variety of Investment Objectives—Like open-end funds, closed-end funds are typically specialized portfolios of stocks or bonds and may be oriented toward capital gains, income, or a combination of these objectives. Fixed Number of Shares—Closed-end funds do not issue shares on a continuous basis, like open-end funds. Rather, the number of outstanding shares in a closed-end fund is fixed (thus the term “closed end”). After an initial public offering, closed-end fund shares are listed on an exchange, much like shares of stock. Publicly Traded at Market Price—Investors in closed-end funds buy and sell shares on an exchange at the share’s market price, which is influenced by general market forces such as demand and supply. As a result, shares may trade at a price above or below that of their net asset value. In contrast, investors in open-end funds purchase and redeem shares directly from the fund at net asset value.

Benefits of Closed-end Funds

Opportunity to Purchase Shares at a Discount—Shares of a closed-end fund may trade at a discount to their net asset value, offering investors the opportunity to buy shares at attractive prices and ultimately reap higher returns should the shares increase in value. Access to Greater Investment Opportunities—Because closed-end funds do not redeem shares, there is no need to keep a large portion of the portfolio’s holdings “liquid” to fund redemptions. This may give portfolio management greater investment flexibility, allowing them to take advantage of certain investment opportunities that might otherwise be unavailable. Lower Management Expenses—Closed-end funds may have lower expense ratios than open-end funds because closed-end funds do not incur the expenses associated with issuing new shares or funding outflows. Potentially Higher Returns—Many closed-end funds use leverage to seek to enhance returns. This involves borrowing money at short-term interest rates and investing the proceeds into longer-term securities that typically pay higher rates. Keep in mind, however, that under certain market conditions, leverage may also increase potential losses. The leveraged capital structure seeks to increase a fund’s yield to shareholders. The effect of leverage in a declining market would result in a greater decrease in net asset value to the common shareholder than if the fund was not leveraged. Any decrease would likely be reflected in a decline in the market price of common shares. Our Closed-end Capabilities   You can access Van Kampen’s investment capabilities through a variety of fixed-income closed-end funds, including tax-free municipal bond funds, high-yield funds and a senior-loan fund. Are Closed-End Funds Right For You?   As with any investment decision, we encourage investors to work with a financial advisor. Your financial advisor can help you evaluate your risk tolerance and goals, and then help you determine which closed-end fund--or funds--may be suitable for you.   There is no assurance that a mutual fund will achieve its investment objective. Funds are subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and that the value of fund shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in a fund. Investors should carefully assess the risks associated with an investment in lower-rated debt securities, such as interest-rate risk, credit risk and liquidity risk that could adversely affect expected returns and/or result in substantial loss. An investment in senior loans is subject to certain risks such as loan defaults and illiquidity due to insufficient collateral backing.