What happens if a fund is too big or too small?
We explain why some funds no longer want to take your money
Funds are often subject to capacity constraints, meaning investors can sometimes be deterred or blocked from investing any more money once the funds have amassed a certain amount of assets.
While it may appear odd to close a fund that is successfully attracting investment, there are very good reasons to do so.
Unit trusts and Oeics are two types of open-ended funds. The fund manager has to find suitable investments each time someone puts money into these types of funds.
Some fund managers have a short list of companies or other assets that they’d be prepared to back. A stream of new money into their fund raises the risk that they keep buying the same things and paying a higher price each time they invest. Overpaying for assets can dampen future returns.
One alternative is to expand the search criteria and invest in companies or assets which weren’t originally targeted by the fund managers. That raises the risk that the fund doesn’t perform as expected.
Refusing to accept new money once a fund gets too big can help to protect existing investors.
It is important to stress that ‘soft’ or ‘hard’ closing a fund doesn’t mean your money is handed back to you. Your money will stay invested.
HOW BIG IS TOO BIG? M&G Optimal Income (GB00B1H05601)