A new fund offer occurs when a closed-end mutual fund company launches a share offering. As with an initial public offering (IPO) of company stock, the cost of shares during a new fund offer is partially based on supply and demand. Nevertheless, the shares in closed-end funds generally sell for a price that roughly matches the present market value of the underlying securities.
Mutual funds are investment portfolios that contain a wide array of different securities. Many mutual funds are open-ended which means that investors can buy new shares of the fund at any time and that existing shareholders can redeem their shares by selling these shares back to the fund company. By contrast, shares in a closed-end fund can only be bought from the fund company during the new fund offer. In most instances, a third party brokerage firm arranges these events. Brokers attempt to interest individuals and institutional investors in the fund and the initial share price is determined by factors that include the types of securities that the fund holds and the number of bidders that are interested in owning shares.
Many closed-end funds contain specific types of securities such as government bonds or stocks issued by small cap companies. In other instances, a fund may contain a number of different types of securities but it may only invest in securities that are issued by particular types of firms that operate within certain industry sectors such as energy firms or financial companies. Brokers attempt to market a new fund offer to the types of investors that are most likely to invest in the fund. Retirees seeking income may be interested in a closed-end income fund, while young professionals may be inclined to buy shares during a new fund offer that involves a growth fund.
Investment brokers are normally paid on commissions which means that these individuals have a financial incentive to market these funds. If large numbers of investors compete for a limited number of shares then the share price rises and the broker's commissions rise in conjunction with the share price. Therefore, brokers attempt to ensure that new fund offers are over-subscribed rather than under subscribed.
Closed-end funds often have a pre-set maturity date on which the fund's managers liquidate the fund's assets and split the sale proceeds between the shareholders. Shareholders cannot liquidate their shares prior to this date but investors can sell shares on the secondary market. In such instances, shares are sold in the same manner as stocks and bonds. This means that the seller and the buyer have to agree a purchase price and that the value of a share can fluctuate throughout the course of the day.
