Municipal Bonds vs the Municipal Bond Fund

Many investors choose to invest in a municipal bond fund because of the unique advantages that it presents. However, many other investors choose to invest directly in municipal bonds. Here are a few things to consider about each type of investment and which one would be best for you.

Municipal Bonds

A municipal bond is a debt instrument that is issued by a municipality. A city government, state government, school, or some other type of public entity can issue municipal bonds. These bonds are issued in order to raise money for certain projects. As an investor, you can purchase these bonds by investing a certain amount of money. In return for your loan, you will receive a predetermined amount of interest for the life of the bond. The major advantage of investing in these types of bonds is that they will generally be tax-free. Even though they typically pay low interest, the tax advantages will often make it a worthwhile investment.

The advantage of investing directly in a municipal bond as opposed to going through a mutual fund is that you get to make your own investment decisions. You will be in charge of which bonds you buy and sell. You will not have to go through a fund manager in order to make any decisions. You will also be the sole beneficiary of the returns that the bonds pay. You will not have to split your winnings with other investors in a fund.

Municipal Bond Funds

The municipal bond fund is a mutual fund that invests in municipal bonds. With this type of fund, you will purchase shares and a fund manager will use that money to purchase municipal bonds. A bond fund could potentially have thousands of different bonds within it. All of the interest payments that are received from the bonds are divided equally among all of the shareholders of the fund.

With a municipal bond fund, it makes investing in municipal bonds much simpler for the average investor. Many consider investing directly in municipal bonds to be difficult. In order to do so, you will have to employ a bond broker and your initial investment will be sizable. Most of the time, in order to purchase a municipal bond, you will have to invest at least $5000 at one time. This eliminates many people from being able to purchase municipal bonds. By comparison, a single share of a municipal bond fund will be significantly less.

Many investors also prefer the passive approach to investment that this type of fund provides. You do not have to worry about locating municipal bonds to buy and bid on them. You simply give your money to a fund manager and they handle everything for you. All you have to do is collect your check every month and the fund handles the rest.

Choosing an Investment

If you prefer a hands-off method of investment, the municipal bond fund could be the perfect investment for you. However, if you like to handle things yourself and potentially bring in more income, investing directly in municipal bonds might be the better choice. 

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