What is a major risk of investing in closed-ended funds?

Investing in closed-ended funds presents a significant liquidity risk due to the limited number of shares available for trading in the market. Unlike open-ended funds, which issue and redeem shares at the net asset value (NAV) based on investor demand, closed-ended funds have a fixed number of shares that are traded on an exchange. This means that the availability of shares can fluctuate greatly based on market demand, potentially leading to challenges in buying or selling shares at desired prices.

When there is low trading volume or limited interest in a particular closed-ended fund, investors may find it difficult to liquidate their shares quickly or may have to sell at a discount to the NAV. This aspect of liquidity risk can be particularly problematic during times of market volatility or when investors need to access their funds quickly. Therefore, understanding and assessing liquidity risk is crucial for anyone considering an investment in closed-ended funds.