Municipal bonds might be an attractive investment option for some investors, particularly those who are conservative and income-oriented. In this blog, La Ferla Group will discuss how municipal bonds work and why someone might consider investing in them.
What is a Municipal Bond?
Municipal bonds are securities issued by municipalities, such as a city, state or county government. Purchasers of municipal bonds are essentially loaning money to the bond-issuer.
These “loans” are then used to fund day-to-day obligations, schools, highways, sewer systems and more.
How do they work?
As mentioned previously, someone who purchases a municipal bond is essentially loaning money to the government organization issuing the bond. The bond issuer is then obligated to pay interest regularly (usually semi-annually) over the course of the bond’s life. Additionally, the bond issuer must return the original investment, or principal, on the bond’s maturity date.
The lifetimes of municipal bonds vary, but it is often somewhere in the range of one to 10 years.
3 Reasons to Consider Investing in Municipal Bonds
1. Tax Exemption on Interest
Almost all municipal bond interest is free from federal taxes, though there are a few exceptions to this rule.
Additionally, in most cases, municipal bond interest is free from state and local taxes. Municipal bonds purchased within an investor’s home state are typically tax free, but bonds from outside of their home state are often subject to state income tax.
Make sure to check in with your Certified Financial Planner™ professional to gain a better understanding of the way municipal bonds are taxed before you invest in them.
2. Relatively Low Volatility
Municipal bonds are certainly not risk-free, but they have relatively low volatility. They tend to fluctuate significantly less than other investment vehicles, such as stocks.
This makes them great for conservative investors and investors who have low risk tolerance and risk capacity. They might not make a huge sum of money for an investor in the short-term, but they do provide reliable streams of income.
3. Portfolio Diversification
Municipal bonds are great for diversifying a portfolio by adding some low-risk investments. In many cases, even investors who follow aggressive asset allocation strategies can benefit from adding in a few low-risk options.
La Ferla Group offers portfolio management investment advisory strategies to effectively balance our clients’ risk and reward. One of these strategies is the Muni Bond Advisor, which is ideal for individuals who want to invest in municipal bonds.