If you're looking for an investment with multiple benefits, and you happen to be civic-minded, you rnight want to consider municipal bonds. They've got a lot to offer.
Municipal bonds, or "munis," are issued in two main categories: general obligation bonds and revenue bonds. General obligation bonds finance the ongoing activities of state and local governments, while revenue bonds pay for specific projects, such as airports, hospitals and other civic institutions.
Thus, when you invest in a muni, you're supporting a valuable project or service in your own state or community. And beyond that, you get some key advantages, including the following:
• Tax Savings - If you're in one of the upper tax brackets, you may be able to achieve significant tax savings by owning munis. By owning any municipal bond, your interest payments will be free from federal taxes, although in some cases they may be subject to the alternative minimum tax. If the municipality that issues the bond is located in your state, your interest payments also may be exempt from state and local taxes. So, if you're concerned about the amount of taxes you're paying on your investments, munis could pay off for you. In fact, the tax advantage of municipal bonds may be so great that you'd have to earn a considerably higher interest rate on another type of bond - such as a corporate bond - just to get the same after-tax return.
• Diversification - If your portfolio is heavily weighted toward equities, munis can bring you a valuable element of diversification. Municipal bonds are impervious to many of the economic factors that cause volatility in the price of stocks. So, municipal bond prices generally do not move together with stock prices.
• Stability - Municipal bonds are among the most secure investments you can own. The default rate on munis especially general obligation bonds - is typically quite low.
Virtually all municipal bonds offer the above benefits. But, beyond these similarities, variations do exist in the municipal bond market. Your choice of bonds depends, to a great extent, on your goals and investment personality. For example, longer-term munis those bonds that mature in 10 years or more - will generally provide a higher rate than shorter-term bonds. Yet, prices of the longer-term offerings also may fluctuate more.
You may want to consider owning a variety of short-, intermediate- and long-term munis. This type of portfolio - known as a bond "ladder" - can help you in all types of interest-rate environments. When market rates are down, you'll have your long-term bonds locking in higher rates. But if market rates are up, you can use the proceeds of your short-term bonds to reinvest in issues with higher rates.
Finally, when you're shopping for municipal bonds, look for quality those bonds that are rated at least "A" or higher by the major rating agencies.
A financial professional can help you determine if municipal bonds are right for your individual situation, and, if so, how you should go about investing in them. So, you may want to start exploring munis soon. You'll be helping your community - and yourself.