What is Municipal Bond Investing?

Municipal bonds are an investment category that has performed extremely well over the last couple of years. Investors are flocking to this area and need to understand the risks and rewards of Municipal Bond investing. These securities are not for everybody and have distinct risks when compared to other investments.

What are bonds?

Bonds are fixed-income investments that pay interest on the principle that is loaned to an entity. The term “fixed income” describes the return received from purchasing an investment instrument within this asset class.  The return is usually fixed over a period and the purchaser receives an interest in the form of a coupon on a fixed term.  The terms for payment of these products can be daily, weekly, monthly, quarterly, semi-annual, annual, or at one lump sum. Most bonds pay interest twice a year.

What are Municipal Bonds?

Municipal bonds are specific bonds issued by state governments, local governments, and other entities to fund their operations and new projects. These bonds are rated by the major credit agencies. The higher the rating is, the more credit-worthy the bond. We suggest investors stick to high-quality AA or higher municipal bonds.

Individual Bonds or Mutual Funds

Should an investor purchase individual bonds or municipal bond mutual funds? One of the best ways to purchase a portfolio of Muni bonds for individual investors is to purchase a municipal bond mutual fund.  These are funds that invest in a wide range of municipal bonds. Only investors who are capable of investing over $100,000 and savvy enough to research the bond’s financial strength should purchase individual bonds.

Which municipal bond mutual fund?

There are many great mutual funds; some of the top firms include Fidelity, Legg Mason, Vanguard, and T. Rowe Price.  Look for no-load, low expense, high credit quality mutual funds with a manager that has a solid track record. Short and intermediate-term funds are the best bets. We suggest investors visit Morningstar to research mutual funds and select the one that meets their requirements of performance, expenses, and portfolio quality.