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How to Choose Municipal Bonds

How to Choose Municipal Bonds

This article provides insights into the concept of municipal bonds that provide high yields, and are known to be low-cost investments.
Scholasticus K
Here's how municipal bonds work. Firstly, a person pays a lump sum to a municipal body such as the local government, municipality, city, county, etc. This sum is to be maintained with such bodies for a certain number of years, which is known as the term of the bond. It 'matures' with time and the investor or the person is repaid the principal amount, along with an accrued interest sum, which is denoted in percentage of the said amount.

The bond finances are put to use for projects of public amenities such as building of roads, bridges, schools, and other services. The revenue is generated directly from the project itself, and in some cases, it is generated from taxes and periodic funds of the State and Federal government.

Some of the best bonds are also the best investment channels, as they have an assured rate of return, plus a very good rate of interest. Few, in fact, yield 20% to 30% returns on the investment amount.

A Basic Guide

In the United States, the Municipal Securities Rule making Board, is the body that governs the issue and operations of these bonds. There are two markets- primary and secondary, which can be accessed with the help of broker dealers. A primary market is where the first issue of bonds is made, while the secondary market is where the already-issued bonds are traded. If you are looking for the best municipal bonds to buy, then the primary market is a good channel. However, some of these are also found in the secondary market.

Now, returns from such bonds would differ from person to person, depending upon how much amount one is willing to invest, the time period of investment, and the rate of return that the bond offers. There are basically several parameters that can be used to conclude and rate the success of these bonds. The following are a few pointers that will help you to determine the best bonds:
  • Have a look at the project purpose for which the bond is being issued. Power projects, logistics, and water projects are the ones, where the revenue is directly derived from the users of public amenities. Such bonds always have a really high return on investment.
  • Check the time period comparison with the total return amount. Some bonds go on for decades together, and have a really great return. They are usually issued at a substantial discount that can either be retained as a long term investment, or can be sold in the secondary market.
  • Check the demographics of the municipality, industrial area, big commercial cities, ports, and agricultural localities that will have really good bonds.
There are certain other features that you can also ascertain, like a tax-free municipal bond, which is very useful. Research and rating agencies also rate these bonds. Moody's, Standard & Poor's, and Fitch Ratings Service, are some of the agencies which can be referred. A price history analysis can be initiated with the help of a CUSIP number, when you are buying from a secondary market.

Best Bonds to Buy

The following are some effective pointers which will help you to choose some of the top municipal bonds. You can also research on those bonds that are parallel to the following ones:
  • Invesco Tax-Free Intermediate (AITFX): Its assets total up to a mammoth USD 1.71 billion. It has a rate of return of about 5% per annum and has a 1.9% yield, with a small 0.38% charge.
  • Marshall Intermediate Tax Free (MITFX): It performed well even during the credit crisis of the economic recession. This bond returns about 5% annually, has a yield of 2.7%, and a charge fee of 0.55%.
  • Vanguard Intermediate Term Tax Exempt (VWITX): It has a good tax exemption and a really good yield of 2.4%. Annually, this bond has given a return of about 5%.
  • USAA Tax Exempt Intermediate Term (USATX): This one's really good and has shown a performance of 7% per annum in the past. The yields of this bond are at 3.3% and it gets a fantastic profit in the secondary market.
  • American Century Intermediate Term Tax Free Bond (TWTIX): It has a really good and steady yield of 2.2%, and depicts a 5% annual performance.
In the above list, the symbols in the brackets are bond codes. A yield is the total return, and an annual performance is the specific return of the year. If this performance is good for a specific bond, you can sell it in the secondary market for a handsome profit margin.

Disclaimer: This article is for reference purposes only and does not directly recommend any specific investment choices.