6.2.1 Types of Closed-End Funds
Types of closed-end funds include the same types as open-end investment companies, such as general equity, including income and growth, global/international equity, fixed income taxable, and fixed income tax-exempt. Closed-end funds are not forced to sell from their portfolios to meet redemptions, so they may offer advantages over open-end mutual funds. They also may offer access to markets that are difficult for mutual funds to invest in, since mutual funds must maintain liquidity. Closed-end funds tend to pay investors higher levels of income because they invest more heavily in income-producing assets.
Municipal bond funds make up the largest category of closed-end funds based on amount of assets. Municipal bond funds provide investor income that is tax-exempt for federal income tax purposes. In some cases, their income is exempt from state or local income taxes. They invest in bonds issued by state and local governments and agencies.
U.S. bond funds focus on high-quality instruments, including Treasuries, government agencies, and investment-grade corporate bonds. All of these produce interest income that is taxable by the federal government. Others may mix lower-grade “high-yield bonds” into the portfolio. Some focus on high-yield bonds for their higher rates of return (albeit at higher risk levels).
Diversified U.S. equity funds focus on common stocks traded on U.S. exchanges in portfolios from a broad mix of companies diversified across many industries, geographic regions, and economic sectors. Some diversified equity funds specialize in a particular asset class or investment style, such as large-cap, small-cap, growth, or value.