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Make Money in Closed-End Funds

Updated on February 9, 2019

Few know about closed end funds!

Few investors know much about closed end mutual funds. I have never seen an advertisement on TV for a closed end fund. Closed end funds trade very much like stocks. I bought my first closed end fund because I entered the wrong stock symbol. I did not know what I bought until I saw my statement and found I had bought the wrong stock. I was trying to buy Black and Decker and ended up with Black Rock Core Trust. This prompted me to investigate what I had bought. I held Black Rock Core for five months while the market tanked and I made money on the trade instead of losing money. This prompted me to investigate closed end funds.

Closed end funds are illiquid. Often they are thinly traded and have large spreads between the bid and the ask price. Buying and selling of these securities takes patience. Closed end funds may not be the choice for a lot of investors but they have some very nice advantages. Most pay a dividend some pay quarterly some pay monthly. Much of the dividend is taxed at a favorable tax rate. Closed end funds are available in many asset classes. Many of those asset classes are hard to find in a regular open end fund. Closed end funds tend to fluctuate less than open end funds which makes them more attractive for the conservative investor.

Closed end funds can be wise investments!

Most people like money!
Most people like money!

Who would buy a closed end fund?

Many owners of closed end funds use them to generate an income stream. Since most pay dividends they lend themselves to generating income. Closed end funds can be used to diversify. Closed end funds are available in for types of investments that are not available to the average investor. Closed end fund managers do not have to worry about redemptions nor do they have to be concerned about large flows of money into the fund. The managers can get into the areas of the market open end funds cannot be effective.

If you are a small investor you can benefit from fluctuations in the discount rate. Closed end funds tend to trade at a somewhat constant discount rate. When the fund trades well below its NAV (net asset value) chances are this is a temporary situation. An investor can far outperform the market with minimal risk using this tourniquet.

Are you thinking about buying closed end funds?

As with open end mutual funds you will need an asset allocation. If you are using closed end funds for an income stream look at 50 percent bonds 50 percent equities.

As with open end funds chose your funds wisely. Just like open end mutual funds there are very good funds and very bad funds. You can do this by checking performance verses a major index. When using internet charts be aware that often internet charts do not take into account dividends paid making the closed end fund performance look ineffective, when in fact the performance may be stellar.

Buy closed end funds when the discount is higher than normal. I will go through some examples here. Closed end funds have a value of assets (net asset value also known as NAV). Closed end funds also have a value which they trade for or market price. As an example at the time of writing this article Royce Value Trust, symbol RVT is selling at 9.58 per share and has a NAV (net asset value) of 11.63 per share. The market price of 9.58 represents a higher than normal discount for this fund. At a market price of 11.25 I would not consider buying this fund. Assuming the NAV was still 11.63. At 9.58 I consider this fund an excellent buy. (November 2, 2009).

Just as another example the NASDAQ premium income and growth had an NAV of 12.11 on October 10, 2008. Its closing market price on that day was 8.75. A month later on November 10, 2008 the NAV had ever so slightly fallen to 12.03 but the market price had risen to 10.25! By June 1, 2009 the market price stood at 12.65 the NAV was 12.88 which is not an attractive of a discount. In addition the fund had paid out .93 cents in dividends from October to June first. If you sold the fund on June first you would reap 13.58 per share from an 8.75 initial investment.

Be patent and watch for the funds you like to sell at a discount before you buy.

Do not buy funds on discount alone. Often funds that are selling at a deep discount are always trading at a deep discount. Often these funds have poor performance records.

Having a well constructed portfolio of closed end funds can provide you with dividends throughout the year. A good number of closed end mutual funds pay a special dividend in December a month when many of us spend a little more than normal.


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