Closed End Mutual Funds

Many people are familiar with typical mutual funds such as those offered by T. Rowe Price, Fidelity, and other mutual fund houses. These investments, common to many IRA and 401K owners, are officially known as “open-ended mutual funds”. So, what is this closed-end fund animal, how is it different from open-ended mutual funds, and why should anyone care?

First the similarities: Both closed-end and open-end mutual funds have stated investment objectives, provide instant diversification, charge management and other fees and can have active or passive investing styles depending on the fund. Both come in stock-oriented and fixed-income oriented varieties.

CEFs have several properties that are different than their open-ended cousins: They issue a fixed amount of shares, they are bought and sold on the stock exchanges, many of them typically use some form leverage, they can often be bought at a discount to net-asset-value (NAV), and their yields and distributions are often greater than their open-ended counterparts.



It’s those last two points that can be very rewarding to us. When they are available at a discount to their NAV, you can literally buy a dollar’s worth of assets for less than a dollar, then sell them if you wish at a profit when the price rises above the NAV. There are many CEFs that invest in taxable and tax-free bonds. Because the yields on these tend to be better than equivalent open-ended funds, you can get a bigger monthly check with CEFs.

There are several good sites to further your education about CEFs. The Closed End Fund Association has an excellent informational website for your continued learning. CEF Connect is anther very nice site that includes screeners and sorters so you can search for CEFs with discounts to NAV, those with the highest yield, and a host of other useful parameters. They are also discussed in detail by Steve Selengut at his site, Sanco Services.

In summary, because closed end mutual funds have some special characteristics, they provide investors an enhanced opportunity to achieve a significant monthly income stream. In addition, many of them trade at a discount to NAV, contributing to their capital gain potential. Since they are not marketed aggressively, you may not have heard about them. Check them out.



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