3 Reasons Why It's A Bad Idea To Invest In Municipal Bond Funds
How often have you heard in yourlifetime that you should invest in mutual funds instead of individual ?
Probably just about every time you've talked about buying an individual, especially a large .
The reason why this advice is common is because if you invest a large amount in one mutual fund, you are invested in a of companies that are selected by a professional mutual fund manager. Thus, there's less likelihood of you losing everything., what happens if the company declares or the price drops dramatically? You could be out a of -- whereas if you're invested in a
However, this rule doesn't necessarily apply to bonds.. You can actually be making a mistake by not in individual municipal
Leslie Beck, aexpert based in Palo Alto, California, explains why:
Values Can Drop
When you own an individual bond, you generally get your back when the bond hits its . In the meantime, you earn interest. If you buy in , most bond funds do not return. The reason is you're buying of . are continually added and sold within the 's portfolio. This means low-interest earning can lose because they're not worth as much when interest rates rise, and they can be sold before hitting their maturity dates in bond funds. Beck says she expects interest rates to rise over the next five years.
2. Municipal Bonds Are Relatively Safe
The interest rate earned is theBeck's clients get from the bond. The municipal bonds she chooses earn interest -- a big bonus if you live in a state such as California or New York with a high rate. You aren't guaranteed the interest rate as you would be with an individual bond. Granted, with interest rates the way they are, this isn't a big concern. But when they rise it be. Caution: Municipal bonds are generally only tax-free if purchased from your own state.
3. Municipal BondsMore Choice On Length
You don't want to get stuck in a long-term bond fund or individual bond if interest rates change. For her clients, Beck generally recommends the following based on length of time for her clients: "When rates are rising, you want to stay in the short to intermediate range. Right now, I would buy one to five years," she says. "When rates rise above 3% for that range, I probably extend to seven years, and if I can get 4% or higher, move to 10 years."
If you can get into a special kind of municipal bond fund where the interest rate is frozen for the length of the investment, that is not a bad deal. You're diversified among while also securing your principal and interest rate. The municipal bonds within the do not change, getting bought or sold, throughout the of the investment.
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