The Municipal Bond Fund: Another Tax-Free Investment

The municipal bond fund is a unique type of investment that allows investors to get involved in the bond market. Many investors get involved in this type of fund in order to minimize their tax liability. Here are the basics of the municipal bond fund and whether or not you need to make it a part of your investment strategy.

The Municipal Bond Fund


The municipal bond fund is a mutual fund that invests solely in municipal bonds. A municipal bond is a debt instrument that is issued by a public organization such as a school or city government. These bonds are issued in order to raise money for capital improvements such as building some type of important building for the city. Investors can purchase these bonds and they will receive a regular interest payment from the municipality. Then at the end of the term, they can get back their original investment as well. A municipal bond fund will take the money that has been invested by all of their investors and use it to purchase thousands of different municipal bonds from many different regions.

Tax-Free Investment


The major advantage of this type of investment is that it is tax-free. Any interest that is paid by a municipal bond does not create any tax liability for you as an investor. Therefore, when you invest in municipal bonds or municipal bond funds, you will essentially receive free money in return. Although the returns for this type of investment are typically small compared to other bonds, when you compare them to the after-tax return of other bonds, they can be very favorable. In some cases, they will actually provide a better return for you overall.

Convenience


The municipal bond fund provides a very convenient way for investors to get involved in the municipal bond market. Many investors might find it difficult to invest directly into municipal bonds. In order to directly invest in them, you must set up a separate account with a bond broker. On top of that, you are initial investment will usually have to be at least $5000 to get started. This eliminates many potential investors because of a lack of funds.

Being able to purchase shares in a mutual fund makes the process of municipal bond investment much simpler. You can do this through a normal brokerage account and the initial investment will be much smaller.

Safety


Another major advantage of this type of investment is that it provides you with a very safe way to invest your money. You are investing in entities that should be considered very safe. It is very rare for a municipality to file bankruptcy after issuing these bonds. Therefore, you should be able to collect your interest for as long as you are involved in the municipal bond fund.

Since you are investing in a municipal bond fund and not individual bonds, this makes it even more safe for you. The bond fund diversifies its holdings over many different bonds. Therefore, even if one entity was unable to repay the debt, it would not adversely affect you that badly.

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