Buying Municipal Bonds

Buying Municipal Bonds

If you’re looking for a great way to diversify your portfolio with a solid tax free investment return, then municipal bonds may be the best choice for you. Especially if your in a high tax bracket!

  1. Municipal bonds can often provide the best return for your money when compared to other types of investment securities, especially if you’re in a high tax bracket. For instances, a corporate bond can provide you with a healthy 5% return on your money, but after taxes your return can very easily be below the average return on a safer tax free municipal bond.
  2. After determining your investment objective and decided what Municipal Bonds will provide you with proper diversification and best return for you dollar then selecting the right type of bond is next.
  3. Much like corporate bonds, Munis are assigned an investment grade. As most know now days putting an investment grade on a security by some organization is not a guarantee that your money is 100 safe. However, these grades do give the investor a good idea of the relative safety of one bond compared to another. After determining your risk tolerance, selecting the right investment grade for your bond will need to be an important consideration.
  4. Another important consideration is how long you can live without the money it takes to purchase a bond. Base on your investment horizon, an investor can chose relative short term bonds to those well over 30 years. Typically, it is important that you have a good idea how long you can do without your invested funds when selecting your choice of bonds. Usually, an investor has to purchase a minimum of 5 municipal bonds, roughly $5000.
  5. Once you have determined your risk tolerance and the duration you can live without needing your money, finding the right bond is next. To take advantage of the tax savings, you must purchase a bond in your state. Municipal bonds can range anywhere from new schools to new bridges. And, based on the city or state that you reside in will determine the grade of the investment bond. High investment grades coincides with safety, thus have a lower yield to maturity. And, low grades bonds come with a higher degree of risk, thus a more attractive yield to find investors.
  6. By using a broker or doing the leg work yourself and opening an online brokerage account can provide you with a window to purchase municipal bonds. Knowing your risk tolerance as well as the duration you can live without your money will be deciding factors in determining the right bond for you.