Question

1. Could a closed-end investment company sell for a discount from net asset value, but a mutual fund cannot sell for a discount? To answer this question you should differentiate a real estate investment trust (REIT) from a firm involved in building, developing, and owning properties .

Answer 1

Hi,

Real Estate Investment Trusts (REITs) are investment through public markets. Like other equity Securities, the shares of REITs are traded on Public Market and hence they are very liquid, whereas Building, develpoing and owning properties are very illiquid and can be sold on one to one basis (i.e. For selling house seller have to search for buyer which makes real estate investment illiquid).

Because REITs are Traded on Public market as equity securities they may be traded at Par, at discount or at Premium. The Price of a REIT will be decided by market by demand and supply of a REIT whereas if we want to sell the House then it will not be sold at discount because the value or the price of house will be decided by owner itself, So it will not be sold at discount.

Similarly to those of REITs, Close ended funds are traded on exchange but they are not traded continuously. So, Exchange (Public Market) will decide the price of Close Ended fund so it may be at Par or at Premium or at Discount, Whereas the NAV of Mutual Fund is decided by it's fund manager based on the performance of fund. So, generally it is traded at par. For Example:- "S&P Blue chip" is a fund of ABC Co. having NAV of $50 as on 09-10-2020. Now, on 10-10-2020 the Stocks of S&P Blue chip fund rose and at the end of day fund manager decided that NAV will be $52. Now onwards the fund will trade at $52. If anyone want to buy/sell units of fund then he/she should trade with Mutual Fund Company at $52. So, Mutual Fund Units can't be sold at discount from their NAV.

Thanks!