Municipal Bond Funds – Key Things to Take into Consideration

Mutual funds that involve tax-free investments are known as municipal bond funds. These funds are great choices for investors who have a large tax burden, but not a whole lot of money. Bonds can unfortunately be as risky as stocks, so if you want to go with this type of investment, you need to be careful. Unless you are buying government bonds, you can never expect your investments to be 100% risk free.

Key things to consider

The tax free aspect of municipal bond funds make them very desirable, indeed, but make sure you know what you are getting yourself into before buying one. Muni bonds can be risky business, so do your homework before deciding whether or not you want to invest in them. Make sure you consider the following before buying a non-taxable fund:

Would you be better off with a taxable fund? It all depends on your tax bracket and state. Consult with a financial advisor if you must, but be sure to compare your options. You may end up with a better return after taxes than by purchasing municipal bond funds.
What will you be paying for, exactly? You need to pay close attention to fees when looking over muni bond funds. This is because municipal yields tend to be less than those on taxable investments. Large fees can quickly eat up the profit differences after taxes. While you are at it, be sure to check into no-load funds with an expense ratio of 1% or less.
What type of returns is available? Look over the history of the municipal bond funds you are interested in to see how well they have performed in the past. While the future is never certain, you can at least get some idea about how the fund was managed in the past. Also, check to see if the same person or people who managed a fund in the past are still managing it.
The alternative minimum tax. This is something you need to watch out for. Many muni bonds are subject to this. Some buyers tend to invest in AMTs because they usually offer higher returns than those of non-MT bonds. Be careful if you want to do this. You should probably ask your advisor or accountant for advice first.
Insurance against default. This is something else you need to consider about municipal bond funds. Should you pay for insurance to protect you against the default of the company you want to buy muni bonds from? Look over the quality of an insurance company if you wish to do this to ensure that it has the funds to pay your claims.

Since you cannot predict the future, the only thing you can do is make educated guesses about the future of your own finances and the overall economy. If you are pretty certain that your tax burden is large, and will continue to be large in the future, then investing in municipal bond funds may be a good option for you. However, keep all the aforementioned keys in your mind as you determine what bond you want to buy.