Quick Cash Corner

When a government or any related organization issues a fund made of bonds at the local or state level it is known as a municipal bond fund.  Since they receive a very favorable tax treatment they are quite popular.  At the federal level, any income generated with a bond fund is free of tax.  At the state level, even the interest is free of tax since in any particular state the bonds are owned by the fund itself.  On the market the municipalities issuing bonds included in these funds are put below yield bonds due to the tax implications yet investors seem to be attracted to them.

By simply calculating the tax equivalent yield you can ideally determine if municipal bond funds would be the right investment for you.  To decide if a taxable bond or a tax free bond might be a better investment it is best that you properly understand the tax equivalent yield.  As an investor if you look merely at the interest return rate on the bond funds you will be making a big mistake like many other investors.  Even if the level of maturity and the quality of the bond is equal to that of a bond issued somewhere else the yield still remains low due to the nature of municipal.

As simple as it might seem when it comes to making choices in these funds, a majority of the people usually go with those that provide higher yield.  Since they can even offer pre tax yield, this should also be considered as well.  You must also be aware of your tax bracket to be able to determine the tax equivalent yield.  Thus, what makes municipal bond funds a preferable choice over bonds which are taxable is that they have significant enough tax implications which are ideal for investors.

The author has more information about municipal money market funds at their website.

Comments Off