Why Investors Should Consider Muni Bonds Now

Written by , January 26, 2012

Why Investors Should Consider Muni Bonds NowThe past year has been a nerve-wracking one for many investors. The major stock market indices have been relatively flat, but there have been lots of volatility in the shorter term movements. And it seems like there’s always a threat of some new piece of news sending the stock market sharply downward.

While safe investments like certificates of deposits are paying interest at near record lows, there is still an opportunity to access a respectable rate of return without having to expose investment funds to the risks of the stock market. This opportunity comes in the form of municipal bonds, which are issued by state and local governmental entities to raise funds for public works projects.

Here is some information and investing advice on why you might want to consider investing in municipal bonds now.

  • Easy to Purchase. Initiating a position in municipal bonds, either directly or through an investment fund, is relatively easy. While it’s not quite as easy as going to the local bank and opening a CD, interested investors can often purchase individual municipal bonds through their brokers or investment managers, and they can also purchase one of the hundreds of mutual funds or exchange traded funds focuses on municipal bonds.
  • Tax Benefits. Traditionally, one of the strongest selling points of municipal bonds is that the interest income that’s received from the bond is exempt from federal income tax. In addition, in some cases the income will also be exempt from state tax. The higher the tax bracket an investor is, the higher the effective return they’ll receive from municipal bonds. These benefits are still strongly in place today, and can make munis a good investment for many investors.
  • Recent Returns Have Been Favorable. As of mid-December, the 2011 year to date performance of each of the major stock market indices was within just a few percentage points of zero. (The Dow was up a few percentage points, while the NASDAQ and the S&P500 were both down a few percentage points.) By comparison, many municipal bond funds are up over 10% percent year-to-date (not including dividend payments of 5-10%), and some are up even more.
  • Default Risk is Still Comparatively Low. Several high-profile financial experts sounded an alarm just a year ago, claiming that because of fiscal difficulties faced by many states and municipalities, defaults on municipal bonds would soon start happening in large numbers. Despite these forecasts, however, the market-wide default rates on municipal bonds have not risen. In fact, muni bond default rates are currently slightly below their historic averages.
  • Stock Market Volatility is High. The recent levels of stock market volatility are simply too much for many investors to bear. Diversified investment vehicles like municipal bond-focused mutual funds have been much less volatile in recent years.
  • Like any other investment opportunity, you need to be comfortable with committing any of your investment portfolio to municipal bonds, whether it’s in the form of individual bonds or a muni bond mutual fund or exchange traded fund. Learn as much as possible about any muni bond investment before you invest.

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