Unlike mutual funds, closed-end funds do not continuously redeem shares. For this reason, closed-end funds are not required to have a minimum amount of cash reserves on hand to pay out shareholder redemptions. However, closed-end funds may hold cash in its portfolio as part of its asset allocation or portfolio strategy.
Closed-end funds sell a fixed number of shares to the public in an initial public offering (IPO). Once all of the IPO shares are sold, investors can no longer purchase new shares unless the fund decides to conduct a secondary offering or a rights offering. A secondary offering is a new fund share issue available for public purchase. A rights offering occurs when the fund offers existing shareholder's the opportunity to purchase additional fund shares.
Cash and Asset Allocation
In the context of closed-end funds, asset allocation is how the fund manager invests the fund's assets. Equities, fixed-income and cash or cash equivalents are the three major asset classes. Cash or cash equivalents include currency, Treasury Bills, certificates of deposits (CDs), money market funds and commercial paper. Cash equivalents are typically short-term investments with a maturity of one year or less.
An asset mix is how the closed-end fund managers distribute the fund's assets among different asset classes. The fund's asset mix is largely determined by its investment objectives and strategies. Typically, the majority of a closed-end fund's assets are invested in stocks and bonds. Some closed-end funds include a small percentage of cash and cash equivalents in its asset mix, while others do not.
Cash and Investment Goals
The goal of all investments, including closed-end funds is to earn a return. Closed-end fund managers may choose to allocate a small portion of the fund's assets to cash and cash equivalents because they carry a low risk. Cash equivalents are also highly liquid investments, which means they can be quickly converted into cash. Cash equivalents can offer a closed-end fund a small bit of stability because of their relatively low investment risk, but also provide the fund with quick access to cash due to their high level of liquidity.
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