The Financial Industry Regulatory Authority (FINRA) issued an investor alert Monday focusing on closed-end funds.
The alert aims to explain what closed-end funds are, and how they differ from traditional mutual funds, among other things. In particular, it stresses that a closed-end fund’s distribution rate is not the same thing as its return, even though they appear similar.
“Investors considering investing in closed-end funds should understand that while the fund’s distributions can include interest income, dividends or capital gains, in some cases distributions also include a return of principal,” said Gerri Walsh, FINRA’s senior vice president for investor education.
FINRA’s new investor alert also explains that, unlike mutual funds, which are in continuous primary distribution, most closed-end funds offer a fixed number of shares in an initial public offering (IPO) and are then traded on an exchange in the secondary market, often at either a premium or a discount to their net asset value (NAV).