Closed-end funds also offer a variety of flavors. They invest in bonds issued by state and local governments and agencies. Professional managers monitor bond ratings and credit quality and usually seek to broadly diversify the portfolio and to avoid adverse events or defaults that might impact a given sector, region or issuer.
Many municipal bond closed-end funds make use of leverage to enhance their return potential.
These funds typically build portfolios consisting of stocks issued by a broad mix of companies and diversified across many industries, geographic regions and economic sectors. Diversified equity closed- end funds often pursue objectives similar to growth or growth and income mutual funds. They can be a way to participate in the fortunes of an economic sector, industry group or specialized security, while reducing risk by investing in many different companies. Some closed-end funds specialize in emerging market securities, which can be highly volatile and somewhat illiquid under adverse market conditions. Since closed-end funds are not forced to sell from their portfolios to meet redemptions, they may offer special advantages over mutual funds in such markets and may offer access to markets that are difficult for mutual funds to invest in, given their liquidity considerations.