Closed-end mutual funds can open up bargains

For experienced bargain hunters, there are favorite stores and special seasons of the year when they know they can find the best deals. Now, a small but growing group of investors is joining the bargain brigade, buying shares in stock and bond mutual funds at discounts up to 25 percent.

The savings come from closed-end mutual funds, which like their open-ended cousins, pool the money from several investors and buy shares in a wide portfolio of stocks and bonds. But unlike open-ended funds, closed-end funds have a fixed number of shares. They are traded on major stock exchanges just as shares in corporations are. Shares in a closed-end fund cannot be purchased until someone sells his shares.

And whereas open-end funds use money from new investors to buy more securities, a closed-end does not have this flow of fresh funds and tends to change its portfolio much less frequently. Unlike open-end funds, where the price is based on net asset value - the value of all assets, minus liabilities, divided by the number of shares - the price of closed-end funds is determined by what people are willing to pay for them. Often investors will not pay full value , thus the discount.

While these funds are bought at a discount, they are usually sold at a discount, too. The trick is to sell them at a smaller discount than what you got when purchasing the shares.

Even though closed-end funds can be bought at attractive discounts, they have not had the attention or sales enjoyed by open-end funds. That's partly because they don't advertise very often and brokers do not promote them.

With a 15 percent discount, you can buy $1,000 worth of shares for about $850 , reducing your outlay. And, because $1,000 of shares are earning dividends, you instantly increase your yield. (You may not always get a full $1,000 in shares, because of a broker's commission; but at a discount broker this commission would be very low. Daniel Fay, manager of the Boston office of Charles Schwab & Co., a discount house, says orders for less than $3,000 cost $18, plus 1.2 percent of the principal invested.)

A key to making money in closed-end funds, says Thomas J. Herzfeld, president of a South Miami, Fla., brokerage firm that bears his name, is watching and waiting. Watch the prices of the funds closely and wait until they reach a particularly deep discount. At times the discounts have been as much as 30 percent.

''In raging bull markets, the discounts are narrow,'' he says. The funds' share prices increase more rapidly than the average when the market is surging. And in a declining market, the discounts also narrow as stock prices come closer to the discounted price of the fund shares. Thus, the best discounts are often available when the market appears to be drifting.

Mr. Herzfeld, who has written two books on the subject, believes part of the reason these funds have sold at such heavy discounts is the lack of attention that has been paid to them. He does admit that his books have only added to the recent publicity about the funds and that since that publicity, the discounts have narrowed. Now, he says, discounts of 5 to 10 percent are more normal; before, 20 and 30 percent was commonplace.

He does not feel, however, that the publicity will make these funds unattractive ''for several years, at least.'' A bargain is still a bargain, he maintains, even if it is small.

Purchasers of closed-end funds occasionally reap an additional benefit: If some of the more aggressive shareholders force the funds to convert to open-ended status, their shares suddenly increase to full net asset value. But reorganizations like this have only happened about 15 times in the last decade, Mr. Herzfeld says, so people should not buy these funds just because they plan on this windfall.

You can follow some of the closed-end stock funds in Monday issues of the Wall Street Journal, listed under ''publicly traded funds.'' Closed-end bond funds are listed on Wednesday under ''closed-end bond funds.'' Herzfeld thinks the bond funds may be more attractive to older investors looking for a more conservative portfolio and current income.

You can also find out more about the funds in a copy of the Wiesenberger Companies Services Directory, available in the reference sections of many libraries and brokerages.