Why Invest in Closed In Funds?
If I had taken a minute to think about it, I would have made this the first post of this board. With ten times more open mutual funds out there, why invest in a CEF (Closed In Fund)?
Like probably 90% of people on here, I started by investing in open end funds. The financial magazines are filled with their ads, the discount brokerage houses have thousands to choose or deal strictly with the individual fund families yourself. You fill out the paper they send you and send in your money. When they receive it, you buy at that day's closing share value. When you decide to sell, they are obligated to buy at that day's closing price. Simple.
I looked at CEFs. I couldn't understand why someone would pay a broker's commission to buy a fund when all those other mutual funds were offered for no transaction fee.
Needless to say, with age (and a little reading) comes some wisdom. CEFs offer things open mutual funds can't and don't.
The whole purpose of using a fund is the professional management you're hiring. Unlike an open mutual fund, a CEF fund manager can invest without thinking about redemptions or a sudden influx of new money. In other words, the manager gets to do their job!
CEFs are allowed to leverage their investments with borrowed money. This can make investing in CEFs a roller coaster ride. Leverage can enhance returns in an up market, but it can do the opposite in a down one.
CEFs trade like stocks. They are bought and sold on the open market during trading hours. Because of that, they can trade at a discount or a premium to the value of the securities they hold. Depending on the market cycle, some CEFs can fly with the eagles at a high premium only to wallow with the clams in deep discount when the market cycle changes. Some investors play CEFs that way, including this investor. A few hours research will reveal candidates.
For the income investor ( I raise my hand here too) CEFs offer steady income, some monthly, others quarterly.
For the young investor looking for investment growth, CEFs have it. There are a number of equity CEFs that pay little in dividends concentrating instead on the long term growth. CEFs give the investor an advantage over open end mutual funds in that the manager can execute his plan with all available moneys because redemptions don't affect him.
Long story short; If your a new investor and dollar cost averaging, open end funds are your ticket. If you've already built a sizeable nest egg in your IRA, it might be time to look at the benefits of CEFs.
Note: This investor has a slanted bias toward CEFs; 40% of his portfolio is invested in them. |
