Or you could consider reinvesting these funds by purchasing additional bonds on an annual basis. Investing in munis instead of other types of bonds could also be beneficial because they may offer higher returns. On the scale of risk and reward, munis typically, but not always, fall between Treasury bonds and corporate bonds. Munis, like Treasurys and corporates, may also experience price volatility. Bond prices fluctuate based on changes in interest rates and the credit quality of the issuer.
However, tolerating this volatility as it occurs may be easier said than done. Be sure to choose a municipal bond investment that is consistent with your risk tolerance. Increased time-to-maturity, higher coupons, longer duration, illiquidity, and bonds trading at a discount are all additional factors which can increase the volatility of bond prices. Municipal bonds are usually intended to be held to maturity, which makes for a pretty low-maintenance investment.
But these bonds are not without risk. You should monitor the credit rating of the issuer on an ongoing basis. That way you have a better chance minimizing potential losses should the credit rating of the bond issuer be negatively affected. Staying on top of the factors that influence credit ratings allows you to adjust your holdings accordingly, if necessary. Another risk to be aware of is that many munis carry call provisions, which means the issuer may redeem the bonds early, even well before maturity.
In general, issuers tend to call, or redeem, munis when interest rates have fallen significantly and it makes financial sense for them to do so. If you find yourself in this situation, you may consider a new investment for the principal from your called bond. Liquidity risk. Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ.
Tax implications. Consider consulting a tax professional to discuss the bond's tax implications, including the possibility that your bond may be subject to the federal alternative minimum tax or eligible for state income tax benefits. Broker compensation. Most brokers are compensated through a markup over the cost of the bond to the firm. This markup might be disclosed on your confirmation statement. If a commission is charged, it will be reported on your confirmation statement.
You should ask your broker about markups and commissions. The background of the broker or adviser selling the bond. Test your knowledge on common investing terms and strategies and current investing topics. Learn about investing risks in certain companies that provide exposure to China-based businesses. Are you prepared for your financial future? Stock Advisor will renew at the then current list price. Average returns of all recommendations since inception.
Cost basis and return based on previous market day close. Investing Best Accounts. Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. Updated: Jul 21, at AM. A Fool since , he began contributing to Fool.
Trying to invest better? Like learning about companies with great or really bad stories? You can open a self-directed account with an online broker to trade municipal bonds. Buying and selling individual municipal bonds requires you to do your own research and be aware of transaction costs. You can also buy and sell municipal bonds in the secondary market, rather than purchasing new issues and holding them until they mature.
An advisor can help you understand the tax implications of municipal bonds and how they can fit into your overall investment portfolio. Alternatively, you can buy municipal bonds via mutual funds and exchange traded funds ETFs. Municipal bond mutual funds are a great way to diversify your exposure to muni bonds while reaping the potential tax efficiency. Like with any other mutual fund, fund managers buy a wide range of municipal bonds to help meet the goals of the fund.
You still get tax advantages with a municipal bond mutual fund, although the range of bonds owned by a given fund might provide fewer direct tax benefits. At a minimum, some income from muni bond mutual funds will be exempt from federal taxes, and, depending on where you live, some may also be free of state or even local taxes. Using a municipal bond mutual fund can help you diversify your holdings and create less of a need to manage several different bond holdings on your own, but you also have to pay the usual mutual fund fees—such as expense ratios and potential sales fees—and your returns are subject to changes in the market value of the bonds, rather than relying as heavily on the yield.
Exchange-traded funds are traded on the market like stocks, making it easy to gain exposure to municipal bonds without actually owning them. Like with mutual funds, income from municipal bond ETFs are usually tax-exempt at the federal level and may come with advantages at the state and local level as well. Even though there is generally more volatility when it comes to price, ETFs are one of the easiest ways to invest in municipal bonds. Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years.
Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree. Select Region. United States. United Kingdom. Miranda Marquit, Benjamin Curry.
Contributor, Editor.
0コメント