Investors are looking for safer ways to protect their investments during the economically tough times. Many are turning to closed end municipal bond funds believing they may be the answer. Like all tax free bond funds there is good news and bad.
One good reason is it is traded like common stock and available in a taxable or tax-exempt variety, which could help those that find themselves in a higher tax bracket. Taxable bonds are generally those in the government or corporate sectors, while tax-free funds are those that specialize in state or locally issued bonds. Given this type of choice investors find that the closed end municipal bond funds is a good way to gain a return from income, capital appreciation, or a combination of both.
One of the most enticing reasons is that, unlike open end funds, the brokers typically don’t charge commissions for a purchase. This is due to the fact that commissions are built into the fund’s share price. Commissions are then paid with the money raised from the initial public offering. Another value to this is that the tendency is to invest using borrowed money increasing returns as prices rise.
On the down-side this type of bond fund has great volitility. While it increases gains during good times it can just as quickly increase losses during a down-turn in the market. A loss in open market pricing of this type could fall below it’s original value well within 6 months.
However, investment opportunities at this time have a great return due to low interest rates and premium discounts. You will find that brokers have the largest amount of discounted funds since 1993 when the last major low occured. But be aware that, although this is a good time to buy, an investor must stay on alert for any rise in interest rates.