Municipal Bond Investing – How To Get Good Returns Without Excessive Risk
When it comes to the safety of your investment plus a respectable rate of return, government entities offer the best of these aspects. One of the most popular in this area is municipal bond investing (or muni bond investing), which provides for a set number of interest payments for a predetermined period. At the maturity date, the full face value of the original investment is retuned to the owner of the bonds by the issuing government entity.
You can choose from either the taxable and tax-exempt municipal bonds, which makes for greater flexibility. As can be expected, the muni bonds with tax exemptions are the more popular types since one need not pay federal and even state and local income taxes on the interest revenue. For those still opting for the taxable types, we suggest consulting a tax professional before investing as the regulations can be on the complex side.
Another choice that must be made in municipal bond investing is selecting between the two varieties. First, the general obligation bonds are issued by the government entity to raise capital for various expenses with the additional aspect of said bonds being covered by the issuer’s taxing power.
Second, the revenue bonds are issued specifically to fund infrastructure projects and the incomes generated from these projects are then used to support the revenue bonds issued for their construction. Since both municipal bonds are tax-exempt, risk-averse investors are attracted to them just as you would if you knew of their existence.
Nonetheless, take note that muni bonds are not without their attendant risks. All forms of investments carry risks with some types like futures and options posing higher risks more than others, say, government bonds. Anyways, municipal bond investing poses the following risks that even the most risk-averse investor must be aware of:
- Credit risk involves the inability of the issuer to either pay the interests on time or to pay the full value on maturity or both. In these recessionary times when state governments are going under, this is a very real risk, indeed. Fortunately, many issuers will take our insurance as guarantee that the bonds will be paid and paid on time.
- Interest rates on the municipal bonds can be lower than the prevailing interest rates on current bond, thus, representing a loss on the part of the investor. Still, a small interest is definitely better than no interest at all.
- Call risk refers to the early payment made on the municipal bonds by the issuer. Ass such, your income stream can be rudely interrupted.
As in other types of investment activities, municipal bond investing requires the application of certain strategies. If you are an experienced investor, you can apply your own techniques from, say, stocks to municipal bonds with a few tweaks along the way. The most basic of these strategies is to purchase the municipal bond with the most attractive interest rate and then hold on to the bond until its maturity date. Ultimately, investing in anything, whether it is in bonds or stocks, requires looking at the bottom line.