Retirement Investments: Municipal Bonds vs. Municipal Bond Mutual Funds - Spokane, North Idaho News & Weather KHQ.com

Retirement Investments: Municipal Bonds vs. Municipal Bond Mutual Funds

What are Municipal Bonds?  They're investments in cities, counties and states, much the same way you'd invest in a company.  You can invest in individual bonds, or you can choose to invest in a Municipal Bond Mutual fund.   But which is better? Our friend, Brad Stark, From UBS Financial Services has offered us this useful information to help break down the question:  what is right for my retirement?

If you're considering an investment in individual municipals bonds, you may find the following advantages:

  •             Individual bonds can be tailored to each client's specific objectives.
  •             Individual bonds permit the development of complex and sophisticated strategies suitable for high net worth clients.
  •             Individual bonds can be built to reflect the market outlook.
  •             Individual bonds can be adjusted to reflect changes in outlook or objectives.

Conversely, with individual bonds you may find the following disadvantages:

  •             Individual bonds may require a larger initial portfolio size.
  •             Individual bonds may require a greater level of involvement and diligence.
  •             Individual bonds may be more difficult to be as diversified as they would be in a fund.

Perhaps a Municipal Bond Mutual fund interests you.  If that is the case, here are the advantages you may find:

  •             Mutual funds have total return investment in a bond-like vehicle for smaller investments.
  •             Mutual funds have greater opportunity for diversification.
  •             Mutual funds are professionally managed, meaning less work for you.
  •             Mutual funds may be more appropriate for smaller initial investments.
  •             Mutual funds allow for dividend reinvestment.

Some of the disadvantages of Municipal bond Mutual funds are:

  •             There is no "fixed" maturity date and full return of principal is contingent upon prevailing market conditions.
  •             The amount of income earned will fluctuate.
  •             You have no control over security selection. 

There are a host of tax-free municipal bond mutual funds to suit a variety of investor needs.  While the majority of municipal bond funds invest in investment-grade securities, there are also high-yield, tax-free municipal bond funds that invest primarily in non-rated or non-investment-grade securities.  Although these funds entail a greater degree of risk, they also can potentially earn a higher yield.  For investors residing in states like California and New York, where state income tax is very high, there are single-state municipal bond funds available that provide a "double-tax-free" benefit - they are exempt from both federal and state income taxes.

With the continuing need to actually keep more of what is earned from your investments, consider consulting with your Financial Advisor and taking a close look at your portfolio to determine where municipal securities might fit in. 

**Information provided by Brad Stark, UBS Financial Services, Inc.  brad.stark@ubs.com