What is a Municipal Bond Fund
A municipal bond fund is a fund that invests in municipal bonds. Municipal bond funds can be managed with varying objectives that are often based on location, credit quality and duration. Municipal bonds are debt securities issued by a state, municipality, county, or special purpose district (such as a public school or airport) to finance capital expenditures. Municipal bond funds are exempt from federal tax and may also be exempt from state taxes.
BREAKING DOWN Municipal Bond Fund
Municipal bond funds are one of a few investments in the market that offer tax exemption. For investors they offer yield and can be a good fixed income option for conservative portfolio allocations.
Municipal bond fund holdings vary by the fund’s objective. They are comprised of municipal bonds which offer investors the advantages of municipal bond securities along with diversification against individual issuer risk. Municipal bonds are structured like standard bond investments with coupon payments and a lump sum payment at maturity. Municipal bond funds pay regulator distributions to investors from coupon payments and capital gains. Distributions are determined at the discretion of the fund.
Strategies can vary by location, credit quality and maturity. Fund companies offer municipal bond funds across the entire credit spectrum. Investment objectives are typically conservative, intermediate or high yield with a consideration for maturity date.
Municipal Bond Fund Taxes
Municipal bond funds are an attractive option for an investor’s conservative allocation due to their income and tax exemption. They are often sought by high net worth investors in higher tax brackets specifically for their tax exemption advantages.
Funds that primarily invest in municipal bonds are exempt from federal tax and may also be exempt from state tax. A municipal bond fund is exempt from state tax if it is comprised of bonds issued primarily in the state of the investor’s residence.
Municipal Bond Fund Yield
In addition to tax exemption, municipals also offer distributions which make them top investment choices for income investors. Funds pay distributions monthly, quarterly, semi-annually or annually. A fund’s distributions can be observed by its trailing and forward yield. The trailing yield provides insight on distributions as a percent of the fund’s price over the past twelve months. Forward yield is based on the most recent distribution.
Municipal Bond Fund Investing
Top performers in the municipal bond category in 2017 included the Dreyfus High Yield Municipal Bond Fund and the AllianceBernstein High Income Municipal Portfolio.
Dreyfus High Yield Municipal Bond Fund
The Dreyfus High Yield Municipal Bond Fund invests in high yield municipal bonds with credit ratings of BBB/Baa or lower. As of December 12, 2017, the Fund had a one year total return of 13.17% and a three year annualized total return of 5.84%.
AllianceBernstein High Income Municipal Portfolio
The AllianceBernstein High Income Municipal Portfolio invests in both investment grade and non-investment grade municipal bonds. As of December 12, 2017, the Fund had a one year return of 9.57% and a three year annualized return of 4.70%.