A Closed-End Fund Trap
By Stephen Gandel

(MONEY Magazine) – Bill Gross, manager of the world's largest bond fund, Pimco Total Return, has invested at least $7.2 million of his own money in closed-end municipal bond funds over the past two years. Why? Closed-ends are the cheapest way to buy munis, which, he says, will eventually be helped by an improving economy and shrinking local budget deficits.

But while closed-end muni funds might be a good bet for Gross, they may be too volatile for you. Closed-end funds borrow money to try to boost performance. But when interest rates rise, borrowing costs go up, and that can erase the funds' gains. Indeed, since rates began rising in March, closed-end muni funds are down an average of 13%. If rates rise slowly, as Gross believes they will, the funds' aggressive trading strategy won't hurt returns. But there are safer alternatives for income investors. --S.G.