Municipal bonds (or munis) are an investor's dream because the income earned from the interest paid is exempt from federal (and sometimes state) income taxes. But more than just another financial instrument, municipal bonds help city and county governments pay for much-needed improvement projects for real-world infrastructure like roads and bridges, sewer maintenance, even new schools.
Before deciding to buy municipal bonds, perform a municipal bond search on the Internet to:
1. Make sure you know what, if any, municipal bond tax applies to the interest earned and any transaction costs involved when you buy municipal bonds.
2. Learn about the issuer and the issue the bond is being used to fund.
3. Check recent transaction prices to make sure you're getting a good price for the bond.
4. Find out whether or not the muni bond is insured.
Do your research on muni bondsMore than 50,000 state and local entities issue bonds for over 2 million bond issues. Daily trading is estimated at $11 billion. Overall, more than $1.5 trillion worth of municipal bonds are in the hands of investors. Some are traded while others are held until they mature. There's a lot to know before investing.
Consider a municipal bond fundWhether or not to buy bonds individually or invest in a municipal bond fund is a matter of debate among financial planners. Individual bonds can provide an investor with freedom and autonomy in controlling his or her own portfolio. Funds, on the other hand, can provide investors with diversity, liquidity and lower trading costs, all in addition to a professional manager who can decide when it's okay to buy slightly lower-grade bonds to get higher yields.
Protect your municipal bond portfoliosMunicipal bond insurance guarantees that you, the holder, receive your interest payment if the bond issuer defaults. Coverage is generally good for the life of the bond and can't be cancelled by the insurer. Only municipal bonds with credit ratings of BBB or higher are typically insured. Policies can also be taken out on municipal bond funds.
- Make sure any municipal bond you buy is issued by a municipality with: 1) a population of 10,000 or more; 2) a diverse economy; and 3) a history of punctual payment on past obligations.