Closed-end funds could be a suitable option for retirees looking for income.

• Over $296 billion is invested in more than 500 closed-end funds.
• The net asset value of closed-end fund shares can be discounted or premium priced.
• Leverage is commonly used by many funds, which can amplify their returns but also intensify losses.

Closed-end funds may be a part of the solution if you're looking to generate income from your investment portfolio.

Although these funds carry more risk than U.S. Treasurys, they can offer decent yields that may be suitable for the fixed-income portion of your investment portfolio. Additionally, they provide an opportunity to invest in the underlying stocks or bonds at a lower price than if purchased on the open market.

It's crucial to comprehend what you're purchasing, as experts advise.

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According to Morningstar Direct, as of Jan. 31, there were over 500 closed-end funds with a total asset value of $296 billion. In contrast, mutual funds have approximately $24.3 trillion in assets.

Unlike traditional mutual funds, closed-end funds are created with a fixed number of shares and trade on the open market like stocks. The share price is determined by investor supply and demand rather than the performance of the fund's underlying assets.

Closed-end fund shares can frequently trade at a discount or above their net asset value.

Certified financial planner Robert Finley, principal at Virtue Asset Management in Chicago, stated that fixed income funds sometimes provide better returns, ranging from 3% to 10% of NAV, due to discounts.

Finley stated that, from our perspective, it offers some safeguard in a climate of increasing rates.

Discounts to NAV can occur in undervalued areas of the market where funds have been invested in equities.

Finley stated that during market pullbacks, closed-end funds often become oversold. As a result, we will examine specific areas that may be discounted.

Closed-end funds are actively managed by experts who pick the underlying investments, such as stocks, bonds, or other assets. Many of these funds generate income that is distributed on a monthly or quarterly basis. According to the Investment Company Institute, 62% of assets in closed-end funds are invested in bonds.

These funds may also invest in less liquid assets such as small companies, municipal bonds, or emerging market securities with their additional funds.

Closed-end funds often use leverage, within regulatory limits, to increase their returns by borrowing money to invest. However, this also means that losses can be amplified if they sell.

Finley stated that closed-end funds are typically volatile and move more significantly when the market experiences a pullback or major move.

The cost of a fund can range from 0.75% to 2% or more, depending on the fund's specifics and the use of leverage in its investment strategy, according to Finley.

The yields vary depending on the underlying assets. For instance, those invested primarily in federally backed mortgages typically have yields ranging from 3% to 5%, according to Finley. On the other hand, those who invest in certain corporate debt with variable rates may see yields of 5% to 7%, he said.

Finley advised that for the fixed-income portion of your portfolio, it is recommended to have no more than 15% of your assets invested in closed-end funds.