Municipal bonds investing appeals to investors who’s want their portfolios to be less susceptible to risk. They are considered a safer form of investment vehicle. You are pretty much guaranteed to get all your capital back as well as agreed interest payments. I said pretty much, so there is some risk which I talk about later in this post. When you invest in a municipal bond you are essentially loaning your money to the government. The government issues bonds through a bond issuer which takes care of paying investors interest payments as well as capital when the bond fully matures. The government then uses this money to fund infrastructure etc.
Municipal bonds are sometimes referred to as munis. Many factors affect the bonds performance such as interest rates, inflation etc. Bonds historically have not performed as well as stocks but have certainly been a god send for some investors when the stock markets performed badly. Bonds are also a good source of income as the issuer pays out interest cheques at agreed intervals. Another similar bond to municipal bonds investing is corporate bonds investing. These are slightly more complex and the returns can be much greater. However as they are corporate debt they carry as significant risk. Bond holders are payed out before stock holders should the company fold. So you should do the same due diligence when considering corporate bonds.
Two Types Of Municipal Bonds
Municipal bonds come in the following two varieties:
- general obligation bonds (A.K.A GO)
- revenue bonds
General obligation bonds are generally issued to help the government raise capital fast to cover outgoings. Revenue bonds, they are issued to fund mainly infrastructure projects. Revenue bonds supported by the revenue generated by the infrastructure projects. Both GO and Revenue bonds are exempt from tax. They are popular also due to the low risk that the issuer will not pay back the debt with interest.
Municipal Bonds Risk Factors
While municipals bonds investing is considered as a safe investment strategy, it is not totally risk free.
There is some credit risk involved. Sometimes the issuer may default on its payments. The issuer could possibly fail to make the interest payments to bond holders. Sometimes they may not even be able to pay the principal back to the holders when it matures.
There are some good ratings agencies which categorise the issuer based on certain factors. Examples of some ratings agency are Moody’s Investors and S&P.
Municapl bonds are a great way to bolster some security into your portfolio. You cannot expect high returns but they will certainly help cushion the blow if some of your other investments turn sour. Municipal bonds investing should be used in a small peortion of your portfolio. Use them to diversify alittle to spread your risk but do not put too much of your investment capital in bonds as the returns and potential for growth will be poor.
