chapter 7 note - Chapter 7 Closed-end Investment Companies,...

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1 Chapter 7 Closed-end Investment Companies, Real Estate Investment Trusts (REITs) and Exchange Traded Funds (ETFs) We have two types of Mutual Funds (MF). Closed-end and open-end mutual funds. In last chapter we discussed open-end mutual funds and in this chapter we study closed-end mutual funds. Open-End Fund : stand ready to redeem or issue shares at NAV. May involve sales charges in redeeming and issuing. You buy the shares from the mutual fund and sell your shares back to the fund at NAV. Closed-End Fund: do not redeem or issue shares, fixed number of shares are outstanding, you cannot buy share directly from the Fund, except at the inception. At the inception, shares are sold to the general public through an initial public offering (IPO). After the IPO, the shares are traded on exchanges or OTC. The market price may not be the same as NAV. Differences: A closed-end investment company has a fixed number of shares, while a mutual fund's number of shares continuously changes. Mutual funds issue new shares when investors buy shares and redeem the shares when investors sell their positions back to the investment company. Investors acquire shares of mutual funds for their net asset value plus any applicable load charges. The shares are redeemed by the fund at the shares’ net asset value minus any applicable exit fees. Closed-end investment companies are bought and sold in the secondary markets. The prices of the shares are established by supply and demand and may sell for a discount from net asset value. (They may also sell for a premium above their net asset value.) Real Estate Investment Trust (REIT) Real estate investment trusts (REIT) are closed-end investment companies that specialize in real estate investments. These investments may be mortgage loans or improvement loans, or the trust may own property and lease it to firms needing the space. Firms that construct, build, and develop properties actively participate in the construction process. REITs may buy existing buildings. Since they are a type of closed-end investment company, their earnings are not taxed at the corporate level but are passed through to stockholders. There is an active secondary market in the shares of REITs, and like the shares of a
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2 closed-end investment company, the stock of a REIT may sell for a discount or premium over its net asset value (i.e., the value of the properties). An equity REIT invests in real property and leases the space to whoever has use for it. A mortgage REIT invests in loans to finance real estate. During periods of inflation, equity trusts may fare better as the value of their holdings appreciates. Mortgage trusts may not do as well if their loans are for fixed rates. If management of a mortgage REIT anticipates inflation, it may make loans with variable rates, which will rise during a period of inflation. An equity REIT has several advantages over the direct investment in real estate properties. The
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chapter 7 note - Chapter 7 Closed-end Investment Companies,...

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