Municipal bonds, or “munis,” are debt security investments in the daily operations or long-term projects of a state, county, city or other government organization. Government entities themselves issue muni bonds, and they offer interest payments typically on a semi-annual basis. Maturity dates of these bonds can be anywhere from just a few years to over a decade, allowing you to select the one that’s best for your financial plans. Investors can pick up these bonds through a number of direct and indirect methods.How to Buy Municipal Bonds
Brokerages remain one of the most direct ways to purchase municipal bonds. These companies provide self-directed investment accounts that allow you to monitor bond prices, ratings and more. For example, TD Ameritrade has the Bond Wizard that allows you to select from thousands of bonds, including munis. TD charges just a $1 per bond transaction fee for this, though some municipal bond purchases may come with further charges. It may cost more to invest in these bonds with Merrill Edge, but its research tools are comparable.Brokerage Comparison Brokerage Firm Municipal Bond Fees Minimum Best For TD Ameritrade
Many times, investors will purchase municipal bonds on an individual basis. However, you can buy them as part of exchange-traded funds (ETF) and mutual funds as well. These are perfect if you don’t have much to spend on your investments. Muni ETFs and mutual funds will diversify your money across an array of municipal bonds without the costs that are customarily associated with doing so individually.
Perhaps you don’t feel ready to decide on municipal bond investments on your own. If you feel this way, you may want to consult a financial advisor. Municipal bonds are favorites of many advisory firms, especially for clients who are more risk-averse. In most cases, your advisor will work with you to develop your personal risk tolerance, time horizon and other factors to discern whether or not municipal bonds are worth including in your portfolio.
Robo-advisors are a viable alternative to financial advisors. Generally speaking, robos come with cheaper management fees than their human counterparts. These automated services attach your personal preferences to a predetermined risk profile. Risk profiles consist of asset allocations that are made up of varying percentages of equities, municipal bonds and any number of other investments that align with your risk tolerance.Robo-Advisor Comparison Robo-Advisor Management Fees Minimum Balance Human Advisors Liftoff
Government entities, most notably state, county and city governments, submit municipal bonds to the public as debt securities. This money helps to fund public works projects, like roads and freeways, and build schools and other parts of society’s infrastructure. In essence, municipal bonds are you (the investor) lending money to these governments with the expectation of regular interest payments. These don’t go on forever, though, as all munis have maturation dates years in the future.
Tax benefits are a major draw of municipal bonds. For example, the interest income you receive over the maturation of a muni is exempt from federal taxes. In some cases, you may even find that you can skip out on state and local taxes as well. This, however, is ordinarily reserved for residents who invest in their own state or local government’s munis.
General Obligation Bonds
As the standard municipal bond, general obligation bonds (GO bonds) are officially backed by the taxing power and credit of the issuing government entity. In layman’s terms, this refers to the method through which investors will be paid back for their investment, which for GO bonds is either through revenue generated from completed projects or taxation. This makes these investments incredibly safe, as they do not call for collateral and the issuing governments promise the appropriate returns.
Revenue bonds pay back investors solely through the money they earn from a finished project. The best way to envision this is the building of a toll plaza on a highway. If a government uses the assets invested in its revenue bonds to fund the tolls, the money that drivers pay will go to repaying investors. They are mostly sold in $5,000 increments, and because they lack taxation as a repayment method, they are riskier than GO bonds. In return, they are paired with stronger interest rates. Revenue bonds are usually long-term investments, as their maturation dates are often a couple decades in the future.
Contrary to GO and revenue bonds, municipal notes mature in anywhere from a few months to three years. Governments also offer these also under the purpose of funding public projects that require more capital. They come in three forms: tax anticipation notes (TANs), revenue anticipation notes (RANs) and bond anticipation notes (BANs). Each of these choices are secured by taxes, non-tax revenue and future long-term bonds, respectively.Benefits and Risks of Municipal Bonds
Like most other bonds, municipal bonds are, for the most part, very reliable investments. Because they offer the backing of county, state and federal governments, munis generally deliver reliable, semi-annual returns. Through this, these investments are perfect for balancing your portfolio for the long-term, being that it takes decades for them to mature.
Municipal bonds are not immune to risk despite their safe nature. In fact, there are three main types of risk to look out for:
Equities are some of the riskiest investments, as they often fluctuate in value with the performance of a company. This quality, however, affords them much higher return possibilities than their peers, including municipal bonds. Which one is better suited for your portfolio is dependent on what your personal risk tolerance is, as well as what your ultimate financial goals are. If you have a while before retirement, it might be worth taking a risk with more equities. But if your golden years are on the horizon, municipal bonds offer reliable returns.
ETFs are one of the most popular investment choices. Diversification is key in the health of any portfolio, so the fact the ETFs are inherently diversified makes them a favorite. ETFs come in many versions, such as market-index ETFs, equity ETFs, alternative investment ETFs and even municipal bond ETFs. These funds provide a perfect balance for investors who want the benefits of munis but are unable to diversify due to lack of trading confidence or funds.Municipal Bonds: Final Thoughts
Municipal bonds are a worthwhile investment for anyone, regardless of risk preference. For risk-averse investors, fixed income securities like munis are essential. On the other hand, even the most daring investor needs munis and other fixed income to balance out stocks. Although municipal bonds can be pricey to invest in individually, muni ETFs are a viable alternative.Retirement Planning Tips
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