Why a Tax Free Muni Bond Can Be a Great Investment

Adding municipal bond investing to your portfolio is a great way to make some money.  These are tax-free investments, so they have an even greater appeal to many investors because of that.  There are some events that have taken place over the past few years — the real estate crash in the U.S. and the recent disasters in Japan — that have made some investors nervous. By and large, there’s no reason to doubt the value of a municipal bond because of these events.

The site Kiplinger.com recently offered some excellent advice from Steven Goldberg to those who are tempted by the allure of a municipal bond investment.

Check for Durations

The site Morningstar.com will give you information on the duration of the bond.  This is important because it tells you how much the bond will react if interest rates rise or fall.

Single-State Funds

Kiplinger.com recommends staying away from these bonds.  The tax-free benefits make them tempting, but there are usually higher fees for these bonds, according to the article.

Avoid Individual Bonds

Buying an individual bond may not be a good idea.  The usual strategy is to buy several of them and then set up the portfolio so that one of them matures every year.  The problem is that, if one of the bonds defaults, it can ruin the entire strategy.  There is also more risk in selling an individual bond, so you have to take that into consideration.

Don’t Get Nervous

The upheavals in the American economy and the natural disasters in Japan, for all their human costs, do bring up serious questions about the economies of both nations.  This means that many investors have actually become worried that municipalities might default on their bonds.  According to Goldberg, this hasn’t happened since 1933.  The recession may be bad, but it’s not anywhere near the scale of the great depression and investors don’t have to worry so much about any defaults causing problems in their portfolios.

Quality Counts

The annual expense ratio is one area where Kiplinger.com recommends exercising caution.  If the expense ratio is very high, there may be better investments out there.  The credit quality is also a big issue.  The article recommends Single A ratings at the minimum and this can be checked at the Morningstar.com site.

Dump Your High-Yield

If it gives more than 5% or has either high yield or high income in the name, it’s time to get rid of it, according to Goldberg.  This type of bond includes some serious risk and the SEC is involved in checking whether the prices of these bonds have been overstated.

In short, these bonds are still good investments, with some important caveats.  One of these caveats is not to let the economy or the conditions in Japan scare you off from a muni bond, however.  These are good-quality, secure investments and, according to the experts, there’s little risk that these bonds will be defaulted upon by the municipalities that issue them.