Tax Free Municipal Bond Funds & Portfolios
Tax free bonds are usually debts issued by local governments that include cities, counties and state level government organizations. Thus, they are also called municipal bonds. The interests of these bonds are usually federal income tax exempt. Furthermore, they are also state income tax free if you purchase those bonds issued by municipals in your state. Note the capital gains you derive from price appreciation of municipal bonds or bond funds are not tax exempt and they are still subject to the usual short or long term capital gain tax.
However, the benefits of municipal bonds are more than just tax free.
Benefits of Municipal Bonds
In addition to the tax free benefit, municipal bonds are usually held by investors who are at high tax brackets. In fact, they are mostly held by retail individual investors. For example, because of the tax treatment, most hedge funds and trading corporations don’t have incentive to hold these securities. Because of this, municipal bonds are actually more stable and less volatile. This actually makes it far easier to construct a good municipal bond fund portfolio, as can be seen shortly.
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