For investing in a highly specialized industry or global region, wouldn a mutual fund offer greater diversification and therefore less risk than a closed-end fund?
Probably not. The mutual fund and closed-end fund may be managed in much the same manner when markets are normal. The advantage can swing to closed-end funds, however, when specialized markets go through rough times. If securities prices decline, fund investors may want out. In closed-end funds, an investor flight can cause the price of shares to decline, but it won’t have an impact on the portfolio manager’s strategy. The manager can ride out the downturn without selling portfolio securities, if he or she chooses. In mutual funds, however, this isn’t always possible. The manager may be forced to sell securities in falling markets to meet redemption demand, and those sales could put additional downward pressure on market prices.
Related Questions
- For investing in a highly specialized industry or global region, wouldn a mutual fund offer greater diversification and therefore less risk than a closed-end fund?
- For specialized investments (such as specific industries or countries), wouldn an open-end mutual fund offer greater diversification than a Closed-End ETF?
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