When you buy shares of stock, there are two ways you can make money. You can sell those shares at a price that's higher than what you paid for them, or you can hold those shares and collect dividends.

Similarly, dual-purpose funds offer investors two ways to make money. A dual-purpose fund is a closed-end fund that offers two classes of stock: common shares and preferred shares. Those who hold shares of a dual-purpose fund's common stock can make money from capital gains, while holders of preferred stock receive income from dividends and interest.

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Closed-end funds

A dual-purpose fund is actually a type of closed-end fund. Closed-end funds are publicly traded funds that raise capital by issuing a fixed number of shares through an initial public offering (IPO). The fund is then structured and listed on a public exchange, but unlike regular shares of stock, shares of a closed-end fund represent an interest in a specific portfolio of investments that is actively managed by an investment advisor. The price per share of a closed-end fund can fluctuate based on market conditions and the changing value of the securities held by the fund.

How dual-purpose funds work

Dual-purpose funds offer investors two share classes to choose from, each of which comes with a different opportunity to profit. A dual-purpose fund's preferred shares, or income shares, entitle holders to dividend and interest income, while its common shares, or capital shares, entitle holders to capital gains based on the value of the fund. Though preferred shares produce a steady income stream for investors, they aren't subject to capital appreciation. Common shares, meanwhile, offer less reliable but potentially greater gains.

When a dual-purpose fund is established, a liquidation date is set for shares to be redeemed at a specific price. On that date, preferred shareholders get priority in terms of payouts, and they're eligible to receive up to the par value, or face value, of their shares. Any remaining capital left over from the fund is then distributed to common shareholders.

Benefits of dual-purpose funds

Because dual-purpose funds traditionally offered investors two different opportunities to make money within the same investment, those who bought shares of these funds could choose the share classes that were suited toward their investment objectives and respective tolerances for risk. Preferred shares, or income shares, tended to attract investors looking to take on less risk, while common shares, or capital shares, typically appealed to the more risk-tolerant. If a dual-purpose fund's portfolio increased in value, then holders of its capital shares had an opportunity to profit nicely. On the other hand, if the value of a dual-purpose fund's portfolio dropped, holders of capital shares stood to lose money. 

Investing in dual-purpose funds

Dual-purpose funds lost popularity in the late 1980s when new IRS rules made them a less attractive investment option. The last few of these funds were scheduled to wrap up in the late 1990s. These days, investors still have their pick of ordinary mutual funds to choose from, many of which offer ample opportunity for meeting investment objectives. 

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