When a Fidelity mutual fund is labeled as “closed to new investors,” it means that that specific fund is not accepting new investments outside of the original fundraising period.
Someone asked:
Some mutual funds on Fidelity like FDGRX are being listed as “Closed to new investors.” Why is that?
Fidelity “Closed to new investors”
When researching Fidelity mutual funds, you may come across some that are just no longer accepting new investors, with the message “This Fidelity mutual fund is closed to new investors”. This status is typically applied when a mutual fund’s total assets under management (AUM) has grown significantly and the fund manager decides to limit new inflows of capital.
As a result, these specific mutual funds cannot be purchased bought by new investors, unless changes to the offering memorandum that will permit the portfolio manager(s) to begin accepting new investors (new capital) into the mutual fund (or allow current investors to liquidate their positions and sell back to the marketplace).
When a mutual fund performs well, many new investors are interested in purchasing shares, however, too much access to capital too fast can have a negative impact on the fund’s performance. So, the main reason for closing a fund to new investors is to maintain its performance and protect existing shareholders who invested earlier (possibly even during the initial fundraising efforts). However, it prevents new investors from participating in the mutual fund.
For investors who already own shares in a closed fund, they can usually continue to add to their positions. However, new investors will have to wait for the fund to reopen or explore other investment options.
Further Explanation
By deciding to close a mutual fund to new investors, it stabilize cash flows and total AUM, the fund manager can mindfully allocate funds into companies that maintain the fund’s overall performance. When a mutual fund’s access to capital grows too fast, it may be challenging for the fund’s portfolio manager(s) to effectively invest all the incoming assets without negatively impacting the fund’s strategy or returns.
Access to too much capital hinders the fund’s objectives by diluting the integrity of the fund’s investment thesis, when it forces the portfolio managers to deploy capital to reach a desired return (by a specific capital deployment date) vs. waiting for the right opportunities following rigorous due diligence.
Thus, the practice of the fund being “closed to new investors” helps ensure that the fund remains aligned with its investment objectives, maintains fund performance to existing shareholders. By closing the fund, the manager can better control cash flows and focus on managing the existing pool of assets without being overwhelmed by new capital.
Understanding why funds close can help investors make informed decisions about their portfolios and manage expectations when investing in popular mutual funds.
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