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Author: katinga Big funky green star, 20000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 88987  
Subject: Re: Closed-end funds Date: 3/8/2001 5:22 PM
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Closed-end funds at a discount are great for buying, but not so great for selling. If they do come back, you pay tax on the "riskless" gain from the discount. But what's scarier is if they don't come back and you need the money. You can only redeem them at the price the market sets.

You pay tax on any gain. Buying at a historically large discount decreases the risk.

Or what if the discount disappears, not due to more demand for the fund, but due to the assets that the fund owns declining in value?

The discount depends on investor perceptions of the portfolio. So your statement makes no sense.

If the discount disappears with the underlying assets declining in value (for whatever reason), that would be a good thing because what you would get in selling the fund would be relatively higher than what an undiscounted equivalent of the fund would obtain. In effect, your downside would have been limited by the original discount.

This may be a good play for people who have absolutely no need for the money and want to get into the sector. But for others, it's difficult to recommend.

It depends on the individual fund just like any mutual fund, closed or open ended. Funds with favorable risk to reward ratios selling at a large discount are great buys. Funds with unfavorable risk to reward ratios are less risky at a discount than the same fund that is open ended. Why? Because the closed ended fund can alway open end, thereby giving its investors the discount.
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