If your goal is to invest in a well-diversified portfolio, you may want to consider adding municipal bonds into the mix. Even if you’re already investing in fixed income, municipal bonds can provide some unique advantages, along with further diversification.
Although you might have heard of these in passing, here are some helpful pointers on what these bonds are, and how they can be advantageous for a long-term investor:
What are municipal bonds?
Municipal bonds (commonly known as “Munis”) are bonds issued by the government. They’re issued by a state, municipality or county to fund capital expenditures and long-term projects, such as a new highway or water treatment plant. Like other bonds, they entitle the owner to interest plus repayment of the principle at a later date.
What Are Their Advantages?
It’s not just what you earn that matters; it’s what you keep. These bonds can provide handsome tax advantages, as they partially offset higher tax rates by sheltering interest income from federal income tax (because they are generally exempt from federal taxes). In certain instances, muni bonds can also offer a tax-free revenue stream, because they can be “triple tax exempt” (meaning free of federal, state, and local taxes).
As mentioned before, most interest payments from muni bonds aren’t subject to federal taxes. Additionally, if the bonds are issued by the state in which the investor resides, they’re free of state taxes. And if they’re issued by the city in which the investor resides, they’re free of city taxes.
Another consideration is that municipal bonds can have a lower risk level than revenue bonds. Compared to private companies, there’s often a lower risk of a government entity defaulting. Although consumers tastes may change and impact a private company’s solvency, the demand for utilities like water and roads is unlikely to shift.
Although they may offer lower returns than other bonds, this can be compensated by their tax advantages (so you get the same return with lower risk in some cases).
Using an advisor to create a municipal bond portfolio
An advisor can help you weigh the options of investing in municipal bonds in light of your needs and goals (including tax efficiency). At LexION Capital, we’re fiduciary advisors who are legally obligated to act in your best interests at all times. We can help you craft a bespoke portfolio with our access to institutional-grade investments, and include municipal bonds in your portfolio. If you’d like to learn more, don’t hesitate to contact us today.
