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such funds would pay higher dividends (based on their original bond yield when the fund invested in bonds) than direct investment in bonds would. On the other hand, if interest rates rise or are believed to be ready to rise, demand for these bond funds would taper off, causing their share price to possibly drop below their NAVs, a risk the shareholders must be willing to live with. Some examples of closed-end funds are the Zweig Fund (stock symbol: ZF) and Central Securities Fund (stock symbol: CET). You can buy these funds simply by placing stock orders with your broker.

Again, most mutual funds investors would go with open-end funds to safeguard from the added risk and complexity that comes with closed-end funds. Also there are lot more open-end funds to choose from as opposed to the somewhat limited choices of closed-end funds. Most of the discussion in this chapter applies to the more popular open-end funds.

Active Versus Passive Management

You might have heard of the expression “beating the market.” This expression means having better returns or outperforming the financial market as a whole. You may wonder what we mean by market here? What is the gauge? In this case the gauge consists of the several benchmark indices that are viewed as the pulse of the market, so to speak. They include DJIA, NASDAQ Composite, S&P 500, etc. for the stock market, and the long bond, 10-year note, etc. for the bond market. Considering this, beating the market is a vague expression — which index do you use as the basis? Many people pick an arbitrary index to compare their returns to, depending on the type of fund invested in. The S&P 500 may be used as comparison for growth or income funds while NASDAQ could be used for aggressive equity growth funds. For example, if S&P 500 was up 15% last year while you had a 20% return …