Many Americans have discovered the advantages of investing in municipal Closed End Funds instead of individual tax free municipal bonds. These Closed End Funds are put together by some very recognizable names like Nuveen, BlackRock and Pimco. Below we discuss some of the reasons why.
To begin with, many investors feel uncomfortable investing in individual municipal bonds because they usually have to purchase a minimum of $5,000 to $25,000 in each bond they buy. To diversify, many investors would need to buy many different bonds. If an investor would like to limit themselves to just 2% in any one issuer, they would have to purchase 50 different bonds. This is not very realistic for most investors.
One alternative that many investors have found are tax free Closed End Funds. Here an investor could purchase a portfolio of several hundred bonds in one package. That's a lot of diversification. These bonds are selected by a professional money manager and so the investor has a lot of the bond selection work done for them.
Since they trade like stocks on an exchange, they are available in smaller investment amounts. Investors like to know that if they want to invest only a few thousand dollars, they can do so. These investments are available through many channels like your full service broker or your discount online broker.
Another reason these investments are very popular is because they pay investors a monthly check. These checks come in very handy to those that want to supplement their income and to pay their monthly bills. For those that don't need the income, they can ask to have the monthly payments reinvested in additional shares.
As for payment amounts, many are currently paying a distribution rate between 5% and 5.8% federally and often times state tax free. That compares very favorably to other investments that are offered out there. These rates can change from time to time based on the bonds that are in the portfolio, decisions of investment company, etc..
These distribution rates are generally higher than what an investor would get on an individual bond because the portfolios are often leveraged. While leverage will give an investor a higher distribution rate, they make the investment more risky and volatile in price. That said, many investors find this risk reward proposition worthwhile. To decide whether or not these investments could benefit you, it is best to talk to your own broker or financial adviser.
If you would like to do some research on your own, go to a great informational website called http://www.cefconnect.com - Here you will find much detailed information on closed end funds plus a link to the Sponsor's own website where you can get detailed information like a prospectus and term sheet. Have fun exploring this unique investment.