Why do closed-end funds trade at a discount to NAV?


When closed-end funds are issued, only a limited number of shares are available and these change hands among investors. The laws of supply and demand determine whether the funds are trading below or above their NAVs.

If there are more buyers than sellers, the price will rise. If there are more sellers than buyers, the price will fall. This is quite clear. What is important to understand is why there are more sellers than buyers, or vice versa.

That is due to various factors including a future outlook. For example, if the outlook for India is positive, closed-end funds that specialize in investing in Indian stocks may be trading above their NAVs. So, if an Indian fund trades above its NAV, what investors expect in this case is that the shares of Indian stocks will rise and the market price will catch up with the NAV.

On the other hand, funds may trade below their NAVs as some investors expect the market prices to decline. The future expectations may already be priced in the value of the NAVs. 



Related articles on this site:

It's about the law of supply and demand

Why Some Closed-end Funds Trade at a Discount?


As pointed out earlier, some investors hope to purchase closed-end funds at a discount and wait for catching up of their Net Asset Values (NAVs).