Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 347

that popular funds tend to influence market conditions for their underlying securities. For example, a popular fund with large holdings in GE could influence GE's stock price upward if it suddenly experiences a jump in demand. This in turn would influence the fund's NAV because a good portion of its portfolio is allocated to GE. Sort of a circular cause and effect, or a secondary effect. But the NAV's price change (if any) is a lot more moderate than that of a stock price when faced with heavy demand.

The same logic holds true if the open-end fund is abandoned by many investors. Selling shares in an open-end fund is as easy as buying them. While this may affect the NAV price slightly (due to the secondary effect), the fund simply sells its investments in correct proportions to pay off the departing investors. Its number of shares and therefore its net assets shrink, but it's NAV continues to remain the same (barring the possible secondary effect).

That secondary effect however becomes a big issue if a fund manager decides to switch investments in a very large fund. Take Fidelity Magellan (FMAGX) as an example. In 1997, with net assets of almost $64 billion, this fund had grown too large to make adjustments to the portfolio a practical task. If the fund wanted to replace one stock with another, it could have caused rumbles in the stock market. The stock which it was about the sell would have lost a significant value while the one which was to replace it would have shot up in price. FMAGX had simply become too big for its own good. The solution: the fund was closed to new accounts in 1997. Old account holders could continue to contribute but no new accounts were accepted. This is known as a closed open-end fund, not to be confused with a closed-end fund which will be covered next. A fund generally makes an announcement before it closes its doors to new accounts. Many investors may view this as a last chance to buy into a fund before it is closed. Realistically, there is no


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    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A
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