Investing Municipal Bonds
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Investing in Municipal bonds is a great tax-free investment option. Munis or Municipal bonds are IOUs issued by governments (country, state and city) to raise funds for executing community projects such as a new school, a hospital or a highway.[br] The major advantage of a Muni or municipal bond is the tax free income it offers. In most of the cases, you can be exempted even from state taxes in case you are residing within the same state where the bonds are issued. If you are subject to Alternative Minimum Tax, you may need to include interest income from certain Munis while calculating tax.
Investing Municipal Bonds: Types of Municipal Bonds
Broadly, municipal bonds can be categorized into two types namely, General Obligation (GO) and Revenue Bonds.
General Obligation Bonds: Due to its taxing power, these bonds are considered to be safe. These bonds are rated higher by the rating agencies and issued to raise capital immediately to fund expenses. These bonds are supported by the taxing power of the issuing authorities. Basically, there are two types of GO bond issues, namely, state and local.
Revenue Bonds: These bonds are issued to raise funds for building infrastructure. These funds are supported through the income that is generated by the infrastructure projects. Both the types of Munis are tax free at the federal level and are attractive to risk-averse investors, due its very low likelihood of defaults.
Investors often need to rely upon credit agencies to invest in Municipal bonds. This is because there is such scarcity of up-to-date, accurate information on municipal bonds.[br]
In these circumstances, there are specific things you need to focus on. Firstly, it is important to find out and identify the agency that is responsible for servicing the interest payments and the financials of the issuer.
You should also ensure that the community has a high net worth citizen base with good growth prospects. It is not advisable to invest in a deteriorating metropolis that has low-income citizen base.
It is also important to ensure that the metropolis has high population with diverse economy. Also, consider the history of the issuer and the payments related to past obligations.
