Should I Buy Individual Municipal Bond Or A Fund ?
Municipal bonds are attractive investments for people who are looking to maximize their after-tax income. However, many investors are wary of investing because they do not know whether they should buy individual municipal bonds or a municipal bond fund. |
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Usually it is seen, that interest income from individual municipal bond is not compounded unless the investor reinvests the money into more bonds, which have the same interest rate. Therefore, if you have many individual municipal bonds, you just earn simple interest.
On the other hand, interest income from municipal mutual fund is automatically reinvested into more bonds and this means that the investor will earn interest on interest. Therefore, the investor would be earning more yields compared to individual municipal bonds.
When it comes to buying individual municipal bond, an investor has to rely on brokers or dealers. This can cost a lot in transaction costs if you are buying multiple bonds. However, when it comes to municipal bond fund, the transaction costs are comparatively lower and you do not have to take any decisions as all investment decisions will be taken by the fund manager.
In addition, when an investor want to sell municipal mutual fund shares, it is easy. All he has to do is make a phone call or sit on his computer. Above all, liquidating or selling shares not affect the quality and maturity of the investment.
Mutual funds also offer more diversification of an investment portfolio. This means one bond fund can have many issuers with different maturity periods. The fund manager has the responsibility to do all the research on the creditworthiness of issuers, and the investor just has to sit back and allow the fund manager to do all the work. The type of diversification that funds offer cannot be match by individual municipal bond portfolio.
Experts suggest that investors should buy individual municipal bonds if they have a capital of $100,000 or more and if they intend to buy at least 10 different bonds to diversify their portfolio. Otherwise, it is better to buy a fund.
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