Income Investors May Find Closed-End Funds on Sale

Most mutual funds are open ended, which means the investment company can issue and redeem fund shares to meet investor demand. By contrast, closed-end funds issue a fixed number of shares in an initial public offering (IPO), and thereafter shares are traded on an exchange.

Both open-end and closed-end funds may hold stocks, bonds, and other types of underlying investments. Unlike open-end funds, closed-end funds do not have to maintain cash reserves or sell securities to meet redemptions, so fund managers can invest in less-liquid securities. They can also use riskier leverage strategies, which can magnify a fund’s positive or negative returns and make them more volatile.

Closed-end funds are often designed to generate a steady income stream — called the distribution rate — that tends to be higher than what might be offered by an open-end fund with similar securities. However, closed-end funds may be better suited for long-term investors who can tolerate the associated price swings.

Median assets: all U.S. households $80K, open-end fund owners $250K, closed-end fund owners $450K

View Discounts in Perspective

The market price of closed-end fund shares trading on a secondary market is determined by supply and demand. The trading price fluctuates with market conditions and can be higher or lower than the net asset value (NAV) of the shares. Shares, when sold, may be worth more or less than their original cost.

If the current price is higher than the NAV, shares are selling at a premium. If the price is lower, they are selling at a discount. A wide discount does not necessarily make a fund a better value. However, buying shares at a wider-than-normal discount may provide a bonus if the gap between the share price and the NAV narrows after investment.

When making investment decisions, it’s important to understand the reasons for the fund’s current valuation, compare the discount to the historical average, and assess the likelihood that the fund may meet its objectives, including any potential income stream.

Distributions from closed-end funds can come from three possible sources: income distributions, including payments from interest and dividends; realized capital gains; and return of capital. Distribution rates are not guaranteed and can increase or decrease in response to market conditions.

Closed-end funds incur broker trading fees and charge management fees. They are generally not redeemable; the investment company does not have to buy back shares to fulfill investor demand.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

John Mensendiek, CFP®
318 Diablo Road, Suite 270 Danville, CA 94526
Phone: 925-552-7383

Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC)

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