There are many reasons to invest in municipal bonds, also called “munis.”
Bonds are safer than stocks and other investments because they pay out money over time. They can also help you keep your money and pay the least taxes.
General Obligation bonds and Revenue bonds are the two main types of municipal bonds. The first ones are backed by the ability of city or state governments to tax people in general. The latter is paid back with the money made by certain projects.
Municipal bonds are a popular way to invest because the federal government often does not tax the interest they pay. Depending on where you live, they may also not be subject to state and local taxes.
Even though the interest on municipal bonds is usually not taxed, the money you make when you sell a municipal bond can be taxed as a capital gain. The rate you have to pay when you sell your bond varies on how long you kept it before you sold it.
How city bonds are taxed can be hard to understand, especially for investors who have never bought them. But the recent rise in taxable municipal bonds suggests that now might be a good time to consider adding muni bonds to your portfolio.
Municipal bonds can help you build a diversified portfolio that isn’t highly linked to other asset types. This makes your portfolio less volatile and increases your returns. Bonds have different maturities, credit scores, and industries so that investors can choose from a wide range of bonds.
Municipal bond sellers usually have a low credit risk, and there haven’t been many defaults in the past. But if the economy goes down, the issuer’s reputation could decrease, making the bond worth less.
If you want to invest in individual municipal bonds, you need to know about their reliability and the interest rate and liquidity risks that come with them. For more diversification, investors can use a laddering strategy and buy various bonds or shares in a bond fund.
No matter your choice, a well-balanced bond strategy should have high-rated and lower-rated bonds. It should also have a mix of different maturities to help handle credit and interest rate risks.
Municipal bonds are a safer option than corporate bonds. Even though the chance of default is much smaller, you can still lose your capital.
Even so, high-quality municipal bonds are a very safe way to spend. The bond issuer with a grade of AAA, AA, or A is in good financial shape and is not likely to fail.
The only bad thing about investing in municipal bonds is that their interest rates are usually lower than those of business bonds. Be sure to look at the real return to see if you can find a better deal elsewhere.
Municipal bonds are a great choice for many buyers because there is a low chance that they won’t be paid back. But they are also subject to risks from interest rates and inflation. If interest rates go up, your set interest rate may not keep up with inflation, or your ability to buy things may decrease.
Many buyers in the fixed-income market care a lot about how easy it is to get their money out. When liquidity is low, buyers don’t have as many choices as when it’s high. They may have to sell some or all of their bonds to get cash.
The fact that the local bond market isn’t very liquid can be made worse by changes in interest rates. When interest rates go up, investors in long-term municipal bonds may see their income go down, and their income may go up when interest rates go down.
Call risk, the chance that a seller will call back a bond before it is due can also make the municipal bond market less liquid. This can decrease an investor’s income and force them to spend at lower rates than they had planned.
There are ways to reduce these risks, but investors should work closely with their Financial Advisors to find the best approach for their portfolio. They should also know how the MSRB runs EMMA, a database that gives information about municipal bond disclosures, market transparency, and educational tools.
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