What hap­pens if a fund is too big or too small?

We ex­plain why some funds no longer want to take your money

Shares - - FUNDS -

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)

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