Closed-end funds offer merit for the long term

''Shares in a closed-end fund are something people inherit from their grandparents' estate, ask 'What are they?,' and then sell them,'' says W. D. MacCallan, chairman of Adams Express Company, a closed-end fund.

It's no wonder someone might ask that question. Though closed-end funds predate ''open end'' mutual funds by a long shot, they rarely advertise.

Compared with mutual funds, they're a bit like those grandparents who started them - older, quieter, and sometimes wiser. The closed-end fund has enough similarities with the ''open end'' mutual fund to put it in the same family. Yet it has distinctive characteristics that identify its own generation.

Like a mutual fund, a closed-end fund ''pools'' the money from its shareholders and invests it. But unlike a mutual fund, when it comes time for a shareholder to sell, a closed-end fund won't buy back - redeem - the seller's shares. Instead, the shareholder must sell publicly through the New York Stock Exchange, where most of the 51 closed-end funds are listed. This makes it easier for the fund managers. They don't have the expense of selling and buying shares, and they can't get stuck having to redeem a lot of shares when many people want to sell in a down market.

Closed-end funds have another distinction: They sell at a discount. This ''peculiarity,'' as one fund president calls it, now puts the market price of a share at an average of 17.2 percent below the share's real value. With some funds it may be near 30 percent.

Suppose someone wants to buy shares of the Adams Express Company, which has a growth record of 104.4 percent over the last 53/4 years and whose net assets at the end of September totaled $280 million. That person could purchase shares for an inviting 19.6 percent off the asset value behind those shares - the going discount rate for Adams. Of course, if someone wants to sell, he must also sell at 19.6 percent below the real price.

An advantage of a closed-end fund over a mutual fund is the discount. Walking through an example, this is how it would work:

A person buys shares costing $80, but with assets worth $100. Those assets go up in value 50 percent, to $150. If the discount of 20 percent remains constant, the new price for those shares should be $120, also a gain of 50 percent. So there is no advantage from a capital gains standpoint. However, closed-end funds are required to distribute most of their investment income. If assets owned by the fund pay $5 in for every $100 of these assets, the buyer of the closed-end shares gets the advantage of $5 of dividends on an $80 investment rather than a

The discount is built into the market, not something invented by the closed-end funds. ''We've had this studied by Wharton and Princeton business schools,'' says Allan Comrie, president of the Association of Publicly Invested Funds, whose members include 18 top closed-end funds. ''It reflects the relationship between buyer and seller, but no one really knows why someone buys or sells.''

Other reasons a closed-end fund might look more attractive than a mutual fund include their steadiness and, in some cases, expertise, according to A. Michael Lipper, president of Lipper Analytical Services in New York. ''There are times an investor wants a portfolio that will not be buffeted by redemption and forced to sell when you don't want to,'' he says.

But, ''you've got a lot more selection among the 516 mutual funds,'' adds Lipper, who closely follows nine closed-end funds.

Most analysts and fund managers agree that closed-end funds should only be considered by ''long-term, conservative'' investors. These funds tend to ride out the bear markets, not falling as severely as the Dow Jones industrial average and Standard & Poor's 500 index. When the market pulls itself up, the funds do too, although often not so rapidly.

Like mutual funds, closed-end funds have varied portfolios. Some funds, like Adams Express Company, General American Investors Company, Lehman Corporation, Nautilus Fund, Source Capital Inc., Niagara Share Corporation, Tri-Continental Corporation, US & Foreign Securities, and Madison Fund Inc. have diversified portfolios. Within the group are funds focusing on income or capital earnings . . . or both. Some funds are a little lopsided in their investments. For instance , Niagara Share Corporation has 20 percent of its assets invested overseas. Adams Express Company has 23 percent in energy, and Nautilus Fund is heavily into computers.

And then there is the specialized group of funds. They're more of a risk, yet when they do well, they do very well. These include Japan Fund, Petroleum & Resources Corporation, Precious Metals Holdings, Energy & Utility Shares, and others.

The average growth record of the diversified funds over the past 103/4 years has been good, at 153.7 percent, according to September's Wiesenberger Investment Companies Service report. This compares with the Dow's 55.7 percent growth and Standard & Poor's 105.3 percent. In the past nine months, the diversified group has been down 7.5 percent, the same as the Dow, but less than Standard & Poor's, which fell 10.8 percent. One fund, however, far outshines these averages. In 103/4 years, Source Capital Inc., in Los Angeles, grew 231.9 percent. In the first three quarters of this year it rose 3.9 percent, while most closed-end funds fell.