Every now and then, you hear of a mutual fund closing its doors to new investors. (Usually, existing shareholders are permitted to add to their investments in the fund.) That's certainly a bummer if you wanted to invest in the fund, though if you keep up with the fund, you might get enough advance warning to buy shares before the doors close.
On the whole, though, fund closings are good news for current shareholders. That's because without them, successful funds will continue attracting more and more money, and the managers will have more and more trouble finding attractive places in which to invest that money. As they begin parking dollars in their less-than-best ideas, the fund's performance is likely to suffer. Responsible managers don't want that, so they close the funds. (Note: many closings are temporary.)
Two weeks ago, Vanguard closed its PRIMECAP Fund (ticker: VPMCX), which had grown to more than $23 billion in value, and its Capital Opportunity Fund (ticker: VHCOX), which topped $7 billion. Last month, T. Rowe Price
It may seem like all the good funds are closing, but they're not. There are many good funds out there, though, there are thousands of so-so ones, as well. According to CBS MarketWatch columnist Chuck Jaffe, "Fund closings are rare -- the biggest year ever was 2002, according to Lipper Inc., when 77 mutual funds stopped taking new cash -- because financial services firms are not in business to turn money away." Interestingly, Jaffe also noted an intriguing finding: "Funds that close to new investors tend to see a drop-off in performance, according to a 1999 study by Morningstar Inc." The study speculated that this was not due to the closings as much as to hot funds simply cooling off.
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Longtime Fool contributor Selena Maranjian owns shares of Microsoft.
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