4 Reasons to Buy Municipal Bonds

Municipal bonds are offered at all levels of the government in order to fund ongoing projects. These bonds supplement a tax base by adding additional cash allocated for specific infrastructure or development goals. As an investor, you can purchase these bonds in order to gain a modest profit and support the project. Municipal bonds are a prudent investment for most portfolios.

#1 Predictable Returns

Buying a municipal bond is like making a loan. At the beginning of the contract, you know exactly what you can expect to earn on the purchase for the remainder of the lifetime of the bond. Of course, there are some items that may be outside of the realm of prediction. For example, inflation could rise much more sharply than expected, and your returns could be minimized. Even in these situations, though, you will still earn the percentage return promised at the beginning of the loan. When compared to other investment opportunities, this predictability provides necessary stability to your portfolio.

#2 Low Risk of Default

Corporate bonds offer low-risk opportunities, but there is always a chance the corporation will not be able to meet the yield payments or even default altogether. Municipalities have a much lower risk of default. In fact, federal bonds carry no chance of default, since the treasury can print more cash if necessary. Local municipalities can potentially go bankrupt. Even when they do, however, they will be required to reorganize instead of liquidate. This means you will receive your payments, but you may have to adjust to a new schedule. You will never receive less in return for a municipal bond than what you paid. Even if your profits are reduced due to inflation, default or bankruptcy, you will still get your principal sum in return.

#3 Support Local Projects

You can elect which local projects you would like to support through bond purchases. With taxes, you have little control over the exact allocation of your funds. With bonds, however, you can directly control the way you support your local government's efforts. First, you will have a chance to vote on a municipal bond project. When you vote to allow a bond project, you are saying you would support the project if given the opportunity. Purchasing the bonds provides you with that opportunity. You get to put your money where your vote is, encouraging the projects you feel are necessary for your municipality to take on.

#4 Tax Benefits

Many government bonds have special tax status. For example, some federal bonds are exempt from both state and federal taxes. Others are exempt in the long run, but yields are taxed. You can elect a bond with a tax status favorable to your situation. It may make sense for you to spend post-tax dollars on the bond and then be tax exempt in the long-run. It may make sense for you to reduce your tax burden in the present by adding bonds to your 401k. These options can maximize your profit by minimizing the sum you must pay in taxable income now or in the future.

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