Manage a Municipal Bond Fund

If you help satisfy debt obligations that local and state governments owe for projects, like new schools and hospitals, these governments are willing to pay you tax-free interest on your money. Municipal bond funds are very attractive to many investors because of their tax-free benefits. Although these bonds aren't taxable, they aren't exactly a cash cow either. Municipal bond funds are notorious for giving a lower yield than other comparable tax bonds.

Invest in a Municipal Bond Fund

Decide what your investment needs are. Planning ahead can help you better manage your portfolio. Situations that require rapid growth within a few years, such as upcoming college tuition fees for your children, may not work with municipal bonds.

Find municipal bonds with a solid rating. Remember that all ratings are based on the quality of the issuing government.

Ask how the fund prices its holdings. You'll find that municipal bonds are traded sporadically, giving investors little knowledge of current market pricing. As an alternative to contacting customer service directly, you can look at the fund's prospectus.

Investigate the fund thoroughly. If you're going to properly manage your portfolio, you'll want to know every aspect of how your fund operates, from pricing evaluations to how to get answers to essential questions.

Get to know the person who will manage your municipal fund. Investing your money is no joke, so you'll want to feel confident in the person you're entrusting your money to.

Determine the appropriate method for purchasing shares. Will you need to go through a broker? Can you buy the shares directly from the fund? You may find that one method is more expensive than the other, which may influence your decision.

Tips & Warnings

• If you're in a higher tax bracket, it is probably more sensible for you to invest in a tax-free municipal bond. Individuals in lower tax brackets, however, would more likely benefit from investments with a higher pre-tax yield.
• If the bond fund you've invested in covers certain private activity projects, then the interest dividends you receive from it may be subject to taxation under the federal alternative tax system.
• Be careful of over-inflated pricing. The fund manager has a great deal of control over the current net market value (NMV) of the fund. There have been instances of fund managers boosting their NMVs unrealistically through the help of independent fund evaluators.

By ehow.com