Many investors know very little about closed end funds. If you understand them you can have higher returns and lower risk. I consider that wise investing. Closed end funds come in a variety of asset classes and trade like stocks. I've known people who have purchased what they thought was a stock paying a high dividend only to discover they really owned a closed end fund. Closed end funds in general do not advertise and do not get the publicity that open end funds do.

Closed end funds are generally a fixed pool of money managed by a fund manager. Some of the best fund managers are managing closed end funds. Closed end funds invest in a wide array of asset classes. For some types of asset classes closed end funds are the only realistic way for the average investor to invest. Since the fund managers are not forced to buy and sell because of unexpected withdrawals or inflows into the fund they can commit money to investments without being pressured to buy or sell assets.

Closed end funds tend to be illiquid thinly traded with large spreads between bid and the ask price. A lot of investors shy away from these funds for this reason. If you are a patent you can use this to your advantage by using a limit order to get the price you are willing to pay.

Closed end funds often trade at a discount. The net asset value of the fund is often higher than the market price. Dividends are paid on the net asset value not the share price so your returns can be significant. Dividends are paid on a regular basis for closed end funds making them a nice choice for an income stream. Many of the dividends are paid at a favorable tax rate making them even more attractive for higher tax bracket investors. Many funds pay a special dividend at the end of the year when extra money can come in handy.

If you are thinking about buying closed end funds you need to follow your asset allocation. You need to be in the best funds. You always want to buy these funds at a discount or put another way when the net asset value is greater than the market price. One strategy is to buy the funds when the discount is greater than the average for the fund. A great fund which averages a 10 percent discount is no deal when it trading at a 5 percent discount and an excellent deal when trading at a 20 percent discount.

Never buy a fund just because it has a handsome discount. Some funds always trade at a large discount because they are poorly run.

Closed end mutual funds can be a lower risk higher reward style of investing. You are going to have to do your homework here and find the best funds for your asset allocation. A well constructed portfolio of closed end mutual funds can be one of the best investment choices you can make. I call that wise investing.