While the municipal bond market is not always easy to understand, it has historically been a safe-haven for investment capital during difficult financial times. With the economical events of the last couple of years, municipal bonds have come back into the spotlight, due to their unique advantages and low-risk.
Municipal bonds are bonds issued by a city, local government, or their agencies. These investments are issued in order to finance the base needs of the issuing municipality. While these needs can vary greatly, they usually include public projects, power utilities, sewer and water systems, bridges, hospitals, and schools.
How To Invest In Municipal Bonds For Tax Advantages
The main benefit to investing in municipal bonds is their tax-free status. Municipal bonds are free of federal income tax, and if the municipal bond is issued for a project within the same state you currently reside in, they may also be state tax-free.
Municipal bonds would be an awful investment were it not for these tax benefits. While the average A-rated bond yield approximately 4% per year, when combined with the tax benefits the yield rises to 5.6% per year.
There are few investments that can provide you with a 5.6% return with low-risk. It is highly unlikely that a city government will default of your bond, unlike a corporation.
Interest Rate Cuts Make Municipal Bonds More Attractive
As Treasuries lose their edge due to interest rate cuts made by the Federal Reserve, tax-free municipal bonds have become more attractive. Because of a failure rate of only 1:400, municipal bonds have proven to be as safe as Treasuries, and many municipals are backed by insurance companies.
You are still exposed to downside risk, however, because bonds can decrease in value. Municipal bonds are considerably less volatile than corporate bonds, and are safe-haven for investors in times of trouble.
Buying Municipal Bonds Are A Bit More Work
There is no central trading hub for municipal bonds, making entering into them somewhat more difficult. But the additional work pays off, as there are substantial benefits to purchasing the bonds directly, therefore, the extra work is usually worth the effort.
When you buy municipal debt directly, you will know all you need to know about that specific bond, such as when it may be called or redeemed, coupon, and maturity date. You also refrain from paying an annual management fee that is associated with managed funds.
Municipal bonds are also a fantastic way to fund the projects in your community that you believe in. If you know of a need in your city, and there is a project in the works, such as a park or hospital, then there are probably bonds you can purchase to help fund it.
Where To Buy Municipal Funds
Often, you can purchase municipal bonds directly from large brokerages. A local brokerage may work best, as they would be more familiar with your city, and its specific needs and projects.
Benefiting from higher volume, and backed by the taxation of your area, general obligation bonds are a good investment. For a near 100% risk-free investment, there are also insurance backed funds available.
Analyze you individual investment objectives to decide if municipal bonds are right for you.