Municipal bonds are the bonds issued by the state, county or the city to raise some money for development of the area. They are also called Munis. If you are a very cautious investor and do not want to take any risk, then investing in municipal bonds is a good thing for you.
In simple words you will be lending your money to the government agencies to carry out developmental work or maintenance work. Since a municipality or a state going bankrupt is a very rare thing, the investor is sure to get the principal and the interest back at the maturity of the bond.
Another significant thing about these bonds is they are tax free bonds. No federal or state tax is levied on the income generated by the munis. Though before investing into municipal bonds you should talk to the broker and find out more details about it. The reason is not all munis are tax free. Some of the municipal bonds are taxable.
There are two types of bonds. One is called general obligation bonds and the other is revenue bonds.
General obligation bonds are issued to finance projects such as building a school or a sewer system. The revenue bonds are issued by utility companies that are authorized by the state or local government. For example a water company or electricity supplying company can issue revenue bonds. The interest is paid when the customers pay their bills for the service provided. Most people think that general obligation bonds are safer than revenue bonds.
Even though the tax-free aspect of the municipal bonds is very attractive feature, before putting in your hard earned money into the bonds you should consider few things. The first one is to take into account who will be paying interests on the bonds and who is issuing the bonds. If the bond is issued by a state which has lower income population and it is a deteriorating metropolitan area then theses aspects will influence on the repayment of your bonds. On the other hand if it is a growing neighborhood and high income group is settling in that area the chance of getting the full money back are more. You should also consider the history of the said issuer of repaying the bonds.
The minimum amount you have to invest in municipal bonds is 5000$ to gain good returns. The more you put in, the more you will gain. Try and understand the economics and try and understand the tax structure of the bonds before investing. Though it is not totally risk free, investing in municipal bonds is rather a safe option.
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