Comparing Bonds Vs Tips Mutual Funds
When it comes to investment people talk about different types of investment like bonds and funds. One has to understand the difference between bonds and mutual funds to decide what type of investment would suit them the best. |
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Municipal bonds are government bonds that are issued by the State that you live in. It may be at the city level or the county level. For example, if your county is making plans for a new bridge, then they may float a municipal bond to attract investments for it. When you invest in a municipal bond, you also get tax benefits. Some municipal bonds are tax free. However, when it comes to comparing the municipal bonds with other types of investments like bonds, for example, you will need to calculate how much tax benefit you are getting by selling the bonds and how much you would have otherwise made in a different bond.
Bonds are also of two types. One is the low to medium risk bonds offered by companies that hold a good rating and credibility. The others are the junk bonds that hold a poor rating and still want investors. The difference is that the low to medium risk bonds offer a steady but low return on your investment. The junk bonds would offer you a very high rate of investment. Bonds are not known to give you high returns but they are low risk compared to stocks and also give you a steady income. So you need to compare the rate of interest or returns form a bond with the tax savings on the municipal bond to decide which is better for you.
On the other hand, TIPS mutual funds are issued by the US Treasury. Every six months the principal and coupon of the bond is harmonized according to the prevailing inflation. So, when the bond matures, you will be paid the coupon as well as principal based on the inflation. And, the investor has to pay taxes on both. Usually the harmonized principal is distributed among investors in the form of dividends. So, you will have to pay not just the dividend tax, but also the tax on the harmonized principal. That is why it is best if you are thinking of investing in TIPS mutual fund, you keep it in your IRA. This way it will be tax deferred, and you will not have to pay any taxes until you cash out your retirement account.
TIPS mutual funds are not as secure as people presume. This is because the price is modified on a daily basis after future inflation is taken into consideration. Also, there is no maturity date for TIPS mutual funds. So, it is not sure that when you think about withdrawing your investment, you will get the entire amount invested. Therefore, this type of mutual fund should be your long term investment plan where a certain part of your income is protect from inflation.
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