To understand what municipal bond funds are, you first have to understand what a municipal bond is. These bonds are made out to local governments and their value fluctuates depending in the credit of the area where they are issued.
Municipal bond funds are typically created by large financial groups and controlled by various professional traders that in turn invest these bonds. They are not subject to taxation and as such are a favorite of investors who have state with high tax rates.
There are five basic types of municipal bond funds;
1. Single-state intermediate-term bond funds
These types tend to seek investment in bonds that mature five to eleven years after issue. This allows them to be free from both state and federal taxation, but a small portion is reserved for AMT.
2. Long term national municipal bond funds
This type prefers bonds that mature a least twelve years after issue. They are also exempt from state and federal tax, with an AMT reserve. The returns on these tend to be higher due to the increased maturity date.
3. Short term national municipal bonds
These types tend to have decreases terms all falling under five years. They are subject to state tax as well as federal ATM, but exempt from federal taxation.
4. Intermediate term national bond funds
These types tend to seek investment in bonds that mature five to eleven years after issue. This allows them to be free from both federal taxation, but a small portion is reserved for AMT. They are not exempt from local and state taxation.
5. Single state long term municipal bond funds
This type prefers bonds that mature at least twelve years after issue. They are also exempt from state and federal tax, with an AMT reserve. They are specific to a certain municipality within a single state and are non transferable.
You don’t have to live in a certain area to participate or purchase these funds. The value of each bond changes with the economy, political climate and other underlying factors. For example, in 2012, the bond, BlackRock MuniYield PA Qly, is currently the top rated bond with only a 1% expense ratio. It is a closed ended traditional fund and considered a safe investment.
Another is the Swab tax free bond fund that currently enjoys an A+ street rating and has an expense ration of only 0.63%. These are only a few examples of municipal bond funds, more information can be obtained from your financial advisor.
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