what is closed ended credit This is a topic that many people are looking for. newyorkcityvoices.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, newyorkcityvoices.org would like to introduce to you Open-End and Closed-End Mutual Funds. Following along are instructions in the video below:
” s do a comparison between open end and closed and mutual funds. So this is is going to be the open end scenario and over here in purple. I will the closed end scenario so in an open in scenario. If i think that i m a good investor.
I might go to some people and say okay. I m gonna give you i m going to sell you some shares and with the money i get i will invest it and so let s say initially and i m gonna use really low numbers and unusually low numbers just to make the diagramming. A little bit easier. Let s say i go to four friends and i get a dollar from each of them normally it d be more like four million friends.
But hopefully this will give you the general idea so here are all the shares so there s four shares and i get a dollar from each of them i get a dollar from each of them so i am able to raise i am able to raise four dollars and we would call right here. If especially if the four dollars is all sitting in cash this four dollars is the net asset value the net asset value of the fund now why do i go through the trouble of doing this well i as the manager can take a management fee off of the net asset value so i might take let s say i take one percent for myself annually one percent annually. And that s what i use for my office base and to pay my own salary and to pay the junior analyst salaries etc. Etc.
Now this is the key point to an open ended fund or open end fund. I should say let s say a fifth person comes along and says hey look. I also want to participate in your fund. Well you if you re running an open ended fund you could say okay sure well right now our net asset value per share our net asset value is four dollars we have four shares so our nav per share is 1.
So it s a 1 let me write it down here 1 nav. Nav per share. So if you give me another dollar. I can create another share for you so.
What i would do then is i would create another share for you you would give me your dollar and now the net asset value of the fund is no longer four dollars i had four dollars but you just gave me a dollar the net asset value is now five dollars and no the net asset value per share has not changed five dollars we have five shares now let s say i m able to manage this quite well and we go to a future state. Where i ve been able to turn the five dollars even after taking out my fees. Etc. Etc.
I m able to turn that into ten dollars. I m able to turn that into ten dollars. So this is the ten dollars right over here i ve invested it well in stocks so the net asset value is now ten dollars. I still only have five shares i still only have five shares so let me draw.
The five shares here. So this is one two three four five and now what is the net asset value for share we ll have a ten dollar net asset value and i have five shares ten divided by five we now have a we now have a 2 nav nav per share. So let s say. The person who happened to own this share down here says okay.
This is great you ve been a great fund manager. But i now need my two dollars. I need it to go i don t know buy a soda or something..
And so this is the other key of an open ended fund open end fund. If this investor. The person who has to share wants to get their cash back. They essentially give it back to the fund manager.
The fund manager has to come up maybe sell some assets so two dollars worth of assets. So the fund manager has to take this two dollars right over here. The fund manager has to take this two dollars. So it will and return it to the person who owned the share.
So the two dollars will go to that person who own the share and then the share will be cancelled and then this share will be cancelled. And so what had just happened well. Now the nav so let me show all of this stuff down here. Has disappeared has now.
Disappeared now the nav is. 8 because we just had to give 82. Dollars to that person who wanted to redeem their share. Now.
It is eight dollars and there s four shares so we still have a 2 net asset value per share. So the main key idea here with this open end fund is if you want to buy into the fund. You transact essentially with the fun. And it ll create a share for you and they will take your they will take your money if you want to redeem your shares.
If you want to get your cash back once again you transact with the fund. Manager you say hey okay. You claim it s a. 200 nav per.
Share. Well i want my 200. For my share back and they ll give it back to you the nav will shrink and the share base the number of shares will shrink and a closed end in a closed end fund you don t transact in that way with the fund managers. It can start off very similarly.
So let s do it in a very similar way. So let s say in a very similar way when you create your closed end fund. You go to for investors who each give you 1. So let me draw that for investors.
Who each give you each give you 1. So you have a 4 you have a 4 nav. 4..
And that asset value now let s go through the same scenario. Let s say a fifth person. Says hey lookee and and similarly the way you pay your bills is you take a management fee maybe it is 1 1 annually on the nav there s different ways that you might structure a fee structure. But let s do show the the commonalities let s do it the exact same way.
But let s say that fifth person comes along says hey i really really want to buy into this fund. You ve created well in a closed end fund once you ve done your initial issuance of shares. You aren t going to create more shares like this or at least you re not going to do it. In a typical way open and mutual fund can do this on a daily basis.
A closed end mutual fund. Typically will not create new shares. So these this is the fixed pool of shares that it has so the fifth person wants to come in and buy into it they are essentially going to have to go to one of the people who already own shares and buy it from them so in a closed end mutual fund. The shares you don t buy and sell with the fund managers.
Once it s created you then trade these shares you trade the shares on a market. And it could be the new york stock exchange or the nasdaq or anything else trade on a trade on a market and the price per share on that market often will actually usually does diverge from the net asset value per share in this scenario. The way i have instructed it we have a 1 1 net asset value per share. But let s say people are feeling really really good about this fund managers ability to invest some money so that share the share that has an 1 net asset value might trade above 1.
Maybe the person said like that person so desperate. They re like i want to pay a dollar 25 for a share like that so it might trade at let s say 1 25. Because there s so much demand to get into this fund. And so you can have a market price per share that diverges from the nav per share and in this case.
When the market price is above the nav per share. We would say that it is trading at a it is trading at a premium. We could think of another scenario. Maybe more people aren t buying into the share.
Maybe. The person who may be the person who has this share right over here. It has second thoughts. Learned new things about the fund manager.
That makes them a little queasy. So they re desperate to get out and so when they trade on the market when they trade on the market. They they re they just willing to get anything that they can get and so let s say they sell they sell for 80 cents per share. So it s 80 cents per share.
So in this situation when the market price has been toward that when the share has been traded for less than the net asset value per share. We say it has been traded at a discount so traded traded at i ll just use the symbol traded at a traded at a discount. Now you might be saying any wait sal i understand with an open end fund..
If the fund grows. I can redeem my shares the shares get cancelled. I get the money back in this scenario. If i m not transacting with the fund itself.
How do i actually make money well. What the fund manager can do and this is actually very close to what a typical publicly traded corporation. Will do is as they earn money in this fund they can dividend it they can dividend it out to the actual shareholders. So let s imagine a scenario.
Maybe this closed end mutual fund. Maybe. It s doing maybe it buys a bunch of assets. The assets grow do well so we ll think about the positive scenario.
Here and once again. Let s say that those four dollars grow to eight dollars those forward grow to eight dollars. So we have an 8 and av. 8.
And av and we still have four shares that hasn t changed so we still have four. Shares let me. Draw the four. Shares we now have a 200.
Nav per share. So we now have a 2 2. Nav per share. And these shares could be trading at any price.
It could be trading at 2 50. It could be trading at a dot. If it s trading at 2 50. It s trading at a premium to its nav per share.
If it s trading at a dollar 50. Now it s trading at a discount to its nav per share. And let s say. The fund managers right here they want to start dividend into some things out so.
What they can do is maybe all of this eight dollars in assets maybe. It s stocks or something else the fund manager. The fund manager can sell some of them they can send sell some of them let s say they sell i don t know let s say they sell four dollars worth of it so then it turns into it s still a 8 nav..
But let s say it s four dollars in cash four dollars in cash and let s say. It s four dollars in stocks four dollars in stocks. And maybe they ll actually want to dividend out this four dollars in cash. So they give every one they give everyone a 1 per.
Share. A 1 per. Share dividend and this is very similar to what it what a publicly traded company might actually do or any company when they issue a dividend. So act after that has happened the nav for this company is now or for this i should say closed end fund.
Which is set up usually as some type of a corporation. The nav is now four dollars because we ve given back four dollars in cash. 4. Nav.
We still have those same four shares one two three four and so our nav per share is 1. So we have a 1 1. And av per share. And you would say oh wait this doesn t sound.
So good. 2. Nav per share for before now. I only have a 1 nav per share.
But we need to remember is each of these shareholders just got 1. So they now have a share that has a 1 nav per share and they got and they got another dollar so they re still essentially got the by holding this they have 2. Assuming they were there when dividend was actually issued. So what are the main advantages.
Disadvantages well. In a closed and in an open end fund because at any on any given day. Investors can redeem more shares the closed and the open end fund. I should say has to keep some money has to keep some money in cash for the redemptions that might occur on that day and a closed end fund.
There s a little bit more flexibility and also the closed end fund managers and have to worry as much about well hey maybe people are gonna take my all the capital away. And i m gonna have to sell a bunch of assets. The open end fund has to worry about that it s really up to the fund manager to decide when they do things like a dividend at a time. That is right for them.
So there s a little bit more ” ..
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