No. of Recommendations: 1
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.
Print the post  


Community Town Hall
Banter, potshots, and all the stuff we said you can't post on ITF. Why not try it?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.