BUYandHOLD began to offer closed-end bond funds several months ago. Since then, several folks asked me whether a closed-end fund (CEF) is safer than trading on the stock market, and whether these bond funds are like mutual funds.

In answer to the question whether CEFs are safe: Every investment is a risk. By this, I mean it's up to us to decide where we place our investment dollars. If we feel we don't have the knowledge or time to invest, then we have two options: use a money manager or not investing at all. Since we're interested in investment vehicles, we face risk. Some risk is low, and some risk is high, dependent on which equity, mutual fund, or CEF we choose.

During times of war, bonds, stocks, futures, and other investment tools reflect the volatility of news delivery and actions taken. If we keep an eye on economic headlines, we'll see one investment tool go up while another goes down. This gives us a clue to the various merits and capabilities of each tool.

For example: On the eve of war, various headlines stated a bond rally, a weakening U.S. dollar, and the rise in gold. After war broke out, bonds went down, the dollar strengthened, and gold fell. All this happened over forty-eight hours. Since we know many investors play the market on historic and technical clues, this information may be no surprise. Often, these daily fluctuations don't affect our long-term investment view. Sometimes, however, it does affect long-term investment strategies. This is the risk, and this is where we are responsible for maintenance of our accounts based on these turns of events.

To answer the second question about similarities between mutual funds and CEFs, let's take a closer look at CEFs: "Bond fund" is a term used to describe an investment company. An investment company collects funds from investors, and invests that money in their choice of interests. Investors share in the profits and losses. The investment company we choose is managed by separate entities known as "investment advisors" registered with the SEC (Securities and Exchange Commission). In this respect, a CEF is much like a money manager, perhaps similar to a mutual fund. However, CEFs have distinguishing characteristics:

• CEFS generally don't offer their initial shares for sale. Instead, they sell a fixed number of shares at one time in an IPO (initial public offering). Then, the shares are typically traded on a secondary market like the NYSE or Nasdaq, just like regular stocks.
  
  
• Prices of CEFs traded on secondary markets after the IPO are determined by the market, just like other equities. The price may be greater or lesser then the share's net asset value (NAV). The NAV equals total assets plus total liabilities divided by outstanding shares. The NAV is calculated hourly, daily, sometimes weekly, and this is dependent on the particular CEF. This is where CEFs are unlike mutual funds, because the price of a CEF fluctuates on supply and demand. CEF price quotes are listed like a stock price quote.
  
  
• CEF shares, generally, are not redeemable because a CEF is not required to buy back shares from investors upon request. Some CEFs are called "interval funds," and these funds offer to repurchase shares at specified intervals. The companies listed at BUYandHOLD may or may not offer interval funds.
  
  
• CEFs are permitted to invest in larger quantities of less liquid securities than mutual funds. These securities are those that can't be sold within seven days at the approximate price used by the fund in NAV determination.

The major differences between mutual funds and CEFs are price, purchase ability, and fees. Some of these differences may make CEFs more attractive than mutual funds to some investors:

• In a mutual fund, the investor buys and sells shares to the fund. In a CEF, the investor buys and sells shares to other investors.
  
  
• The investor has little control of the purchase price of a mutual fund, where the CEF is available at the investor's choice of price dependent on supply and demand.
  
  
• Mutual fund fees are based on trades and support of the investment company, and vary on the choice of investment company and whether the fund is open- or closed-end. CEF fees are based on broker fees (which vary according to the brokerage chosen) and support of the investment company.
• We can purchase the funds listed at BUYandHOLD with the same ease that we use in purchasing stocks.

The ease of trading seems paramount to many CEF investors. Experienced CEF investors also seem to favor the same ideals any stock market equity investor would favor. This means a CEF investor tries to buy low and sell high. Although we're never privy to when a stock is at its lowest low or highest peak, we can use the same tools we use in stock market purchases to justify our reasons when buying or selling closed-end bond funds.

Hopefully, these explanations answered the two major questions I've received on BUYandHOLD closed-end bond fund offerings. If you want to discover more about these funds, go to BUYandHOLD's explanations, where you'll also find the list of funds available.

Until next week,
Linda Goin