Municipal Bond Forum
‘Discounted’ fund
Q
I recently purchased several closed-end muni funds at a 12% to 15% discount to NAV. On average, the funds all contain at least 75% AAA bonds. How does one compare this fund “discount” to owning individual bonds?
A
James A. Klotz responds:
The most important difference is one you illuminate in your question.
An individual bond cannot trade below its net asset value. Anyone who bought these funds as a new issue has a 12% to 15% market loss. Fund returns, as opposed to the returns of individual bonds, are reduced by ongoing management fees.
If you hold individual bonds you will receive the full face value of your investment at maturity or if the bond is called. This is not true of a fund, which has no fixed maturity date.
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