85 Cents for a Dollar?

Psst! How would you like to buy a buck's worth of stocks for pocket change? That's right, I'm offering you a dollar of equities for those 85 pennies dangling in your pocket. Interested?

Before you start looking around for counterfeit Rolex watches or bootleg DVDs, let me assure you that this is a perfectly legitimate proposition. In the world of closed-end mutual funds, just about every investing vehicle trades at either a discount or a premium to its underlying net asset value.

Last month's successful launch of Motley Fool Champion Funds may have alerted some investors to seek out top-notch, no-load, actively-managed mutual funds, but closed-end funds may also be worthy of your attention. Unlike the traditional open-end funds with five-letter ticker symbols that trade at net asset value, closed-end funds actually trade in the open market. That's why their prices fluctuate. However, the markups and markdowns can sometimes border on the extreme.

Tri-Continental (NYSE: TY  ) is the 85-cent pitch. It's been around since 1929. It has a reasonably low expense ratio of 0.7%. Its top holdings are blue chips you know like Citigroup (NYSE: C  ) , Microsoft (Nasdaq: MSFT  ) , and Altria Group (NYSE: MO  ) . Yes, before coming back strong in 2003, the fund closed out each of the three previous years in the red. Unfortunately, that happened to quite a few mutual funds. But looking out over a longer 10-year period, the fund has averaged annualized gains of nearly 8%. It's less than the S&P 500's headier 11% annualized return, but it's in the ballpark of the 8.15% returned by its growth and income peers.

So, why was it that over the weekend, as the company's net assets added up to $20.39 a share, the stock closed at only $17.33? The 15% discount isn't a news flash. Over the past two years, the fund has traded at discounts between 11% and 16% of the sum of its parts.

It's not alone. Other notables like Salomon Brothers Fund (NYSE: SBF  ) and Gabelli Global Multimedia Trust (NYSE: GGT  ) trade at similar markdowns. On the other side of the spectrum, you have closed-end alternatives like Salomon Brothers Global Partners Income (NYSE: GDF  ) and Gabelli Utilities Trust (NYSE: GUT  ) trading at substantial premiums to their underlying assets.

It's hard to justify paying a significant premium for a marked-up fund, yet that doesn't mean that buying any fund at a discount is a winner move. Tomorrow, we'll take a look at the advantages of closed-end funds -- along with some intriguing possibilities.

Do you prefer open-end funds to closed-end ones? Is the fact that shares of the closed-end funds trade actively throughout the day a positive or a negative? What did you think of the first issue of Motley Fool Champion Funds ? All this and more -- in the Mutual Funds discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz will gladly pay you 85 cents for that dollar you're holding. He'll even make exact change! However, he does not own shares in any company mentioned in this story.