A dual-purpose fund is an investment fund the ownership of which is divided into both preferred shares and common shares. Investors can choose to buy preferred shares in the fund and earn dividends, or to buy common shares in the fund and profit from potential capital gains.
Like preferred shares in company stocks, the preferred shares of dual-purpose investment funds have a face value which does not grow or decline. The dividends paid out to holders of preferred shares are proportionate to the face values of the shares they hold. On the other hand, the common shares of dual-purpose funds do not pay dividends, but their value may grow or decline depending on the fund’s performance.
Dual-purpose funds have liquidation dates which are pre-specified in their statutes at the time of founding. When the fund is liquidated, holders of preferred shares are compensated with the nominal value of their shares – the amount which they paid for them. The remaining fund capital is divided among holders of common shares.
Dual-purpose funds are typically closed-end funds, meaning they are required to hold a fixed amount of capital and are not obligated to buy back their own shares from shareholders.
By using dual-purpose funds, investors can balance their investment between low-risk preferred shares with regular dividends and higher-risk common shares with high capital gains potential.
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