If you are looking for excellent returns with low risk, you may want to explore your options in tax free mutual funds. Tax free bond funds have long been popular with wealthy investors as they invest in tax-free municipal bonds which are exempt from federal – and sometimes local and state – taxes.
As these types of bonds are set up to be a tax-free investment, they are not subject to any federal tax regulations. When you invest in tax free bond funds you can realize greater profits and lessen your tax burden. It is important to find and research the best tax free mutual funds for your investment strategy.
As there are different types of tax free municipal bonds, there are also different types of tax free mutual funds. It is important to screen all potential investments to find the tax free fund that best suits your needs. Online broker ETrade offers a comprehensive fund screener to assist you in locating the tax free mutual fund that is right for you.
Best Tax Free Mutual Funds: Types Of Tax Free Mutual Funds
Tax free mutual funds can invest in two types bonds: General Obligation Bonds and Revenue Bonds. A General Obligation Bond are bonds that the state may repay to the bond holder in any way that is legal under state or local law.
A Revenue Bond guarantees that the repayment of the bond will be through means that relate to the intended use for the bond per an agreement between the bond holder and the issuer.
You should avoid the third type of municipal bond referred to as “private activity bonds”, as they are taxable under the AMT – Alternative Minimum Tax – which more and more middle class investors are finding themselves subject to this tax.
It is important to know if your tax free mutual fund holds any private activity bonds if you feel you will be subject to the AMT in the near future. Many of the best tax free mutual funds already avoid these types of bonds.
Benefits To Investing In The Best Tax Free Mutual Funds
The best tax free mutual funds are designed to invest in only those municipal bonds that will generate the most realized profits for the investor, while limiting the amount of tax exposure they will be subject to and lowering their exposure to risk.
Tax free mutual funds can provide an effective way for investors to invest their funds in a lower-risk venture than if they were to purchase individual shares in a publicly traded company. These mutual funds are an excellent vehicle to both grow and preserve your capital from the high cost of taxes.
You can further reduce your expenses by using a low-cost broker such as ETrade or Zecco, which offer affordable investment plans, low commissions on executed trades and research and professional advice services give you a leg up on your investments.
Research every potential investment by reviewing the fund’s prospectus prior to investing. Look for longevity in the tenure of the fund manager, as well as the fund’s historical performance versus both its peers as well as the broad market.
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