2025 Dual-Purpose Fund Guide: Prices, Benefits, and Investment Insights

What Is a Dual-Purpose Fund in 2024?

A dual-purpose fund is a type of closed-end investment fund that offers two distinct classes of stocks: common shares and preferred shares. This structure allows investors to enjoy the advantages of both growth potential and steady income within a single fund.

• Common shares appeal to investors focused on capital appreciation over time, though these shares may or may not pay dividends.
• Preferred shares cater to those prioritizing reliable dividend income, typically maintaining stable value with less price appreciation.

While dual-purpose funds were more popular in the late 1970s and 1980s, changes in tax regulations reduced their appeal compared to other investment vehicles. However, they remain relevant for investors seeking a balanced approach between growth and income.

Key Highlights of Dual-Purpose Funds

• Combine growth-oriented common stock with income-focused preferred shares.
• Operate as closed-end funds, trading on exchanges throughout the day.
• Offer a unique investment strategy blending capital gains and dividend income.
• Have evolved but still resemble actively managed mutual funds in some aspects.
• Popular examples include the Eaton Vance Tax-Managed Global Diversified Equity Income Fund, known for liquidity and size.

How Do Dual-Purpose Funds Work?

Dual-purpose funds serve investors who want to balance risk tolerance and income needs simultaneously. By holding both common and preferred shares, these funds attempt to deliver growth and steady dividends. This hybrid approach suits investors looking for diversified income streams and capital appreciation within a single fund.

Unlike open-end mutual funds, which price shares once daily, dual-purpose closed-end funds trade like stocks on exchanges, with prices influenced by supply and demand as well as the underlying asset values.

Closed-End vs. Open-End Funds: What You Should Know

Closed-end funds issue a fixed number of shares that trade on exchanges throughout the day, requiring a brokerage account for transactions. Their prices can trade at premiums or discounts relative to their net asset value (NAV), influenced by market demand and the fund manager’s reputation.

In contrast, open-end mutual funds issue and redeem shares at NAV once daily and are generally more liquid. Investors should consider liquidity and price volatility when choosing between these fund types.

Investment Considerations for 2024

While dual-purpose funds provide a balanced investment approach, they may face liquidity challenges compared to more common mutual funds and ETFs. Potential investors should evaluate the fund's trading volume, expense ratios, and dividend policies before investing.

Comparing Dual-Purpose Funds with Treasury STRIPS

Dual-purpose funds’ common shares are somewhat analogous to Treasury STRIPS, which separate bond coupons from principal, focusing on price appreciation rather than income. Preferred shares in dual-purpose funds represent the income component, providing steady dividends similar to bond coupons.

This separation allows investors to tailor their portfolios according to income needs and growth objectives.

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