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Should You Own a Muni Fund?

edited January 14 in Fund Discussions
https://www.morningstar.com/articles/961786/should-you-own-a-muni-fund

Should You Own a Muni Fund?
Unless you're in one of the highest tax brackets, the tax advantages might be smaller than you think.


Amy C. Arnott, CFA
Jan 15, 2020
Investors have been pouring money into municipal-bond funds. For the trailing one-year period ended November 2019, inflows into all municipal-bond fund categories totaled about $95 billion--the highest annual inflow since 2009. Taxable-bond funds still hold far more assets overall, but municipal-bond funds have been gaining ground, with nearly $850 billion in total assets as of Nov. 30, 2019. The appeal of these funds is largely based on their tax-advantaged status. In the wake of the 2018 tax law changes, fewer people can itemize deductions, which makes investment vehicles that help reduce taxable income more compelling

Another key question is whether to invest in individual bonds or in a diversified mutual fund. If you have a brokerage account, you can generally buy individual municipal bonds in increments as low as $5,000. But while transaction costs for trading municipal bonds have declined significantly, they're still relatively high. The Municipal Securities Rulemaking Board estimates that the average spread between buy and sell prices was about 80 basis points for retail investors as of April 2018. These transaction costs would eat up much of the tax advantage of holding individual bonds unless your portfolio is large enough to buy bonds in larger increments. Even then, you'd probably need to buy at least 20 higher-quality bonds to help mitigate bond-specific risk. And because the municipal-bond market is notoriously opaque and illiquid (though less so than it used to be), you should also plan on holding any individual bonds until maturity.




We have been doing the later past 10 or 12 yrs, buying private muni and corp bonds
Could not have been happier
Just monitor the bonds carefully and looking at bond cusip/credit reports/ (see which funds/etf dump the bond) routinely to prevent any bankruptcy

Comments

  • Old_Skeet owns a muni income fund to add some diversification to his income sleeve.
  • I've read elsewhere that $50K is a bare minimum for muni diversification, which would mean 10 bonds, not 20. Still not the same thing as picking up a couple of T-bills.

    Munis, like Treasuries, have become more attractive for middle income couples, who may no longer be deducting state income taxes because of the $24K standard deduction and/or the the $10K cap on SaLT deductions.

    While technically munis have had a negative correlation with the S&P 500 over the past decade (mentioned in M* article), it may be more accurate to say there's been no correlation at all, positive or negative. The coefficient of correlation was -0.02, making the R-squared 0.0004.
    https://www.lordabbett.com/en/perspectives/marketview/municipal-bonds-look-beyond-tax-free-label.html
  • Tax rates are not the only reason to buy or not buy muni funds. I own one in my taxable account so that I can do Roth conversions. Any extra taxable income reduces the amount I can convert. Also I am using the muni I have for future income. Not exactly a cash sub but a safer fund than the equity fund that the proceeds came from.
  • There are a lot of factors that go into deciding if you want to own a Muni fund. I know some investors, who actually use Muni funds in tax exempt accounts, not for tax issues, but simply because they like the risk/return attributes they provide. In taxable accounts, you also have to measure how important the tax exempt holding is, compared to a taxable bond fund, that has good tax ratio characteristics, and can provide higher yield with similar risk characteristics. In my taxable bracket, I regularly hold at least one Muni fund, but I hold mostly taxable bond oefs with low Tax Ratios, or I hold taxable bond funds that are "tax managed" funds.
  • Our combined income is sufficient, shall we say. I'm thinking of adding PTIMX because it s a Muni. The monthlies aren't quite as much as its sister fund, PTIAX, but still nicely above a great many other bond funds of all sorts. Example: PRSNX and RPSIX give me a bit more than 3 cents per month, lately. ...Even though the Muni fund pays less that PTIAX, it could let me relax, knowing that the dividends are tax-free. I sure don't want monthly dividends to be the reason I'd have to pay more in taxes. Maybe I'm concerned about nothing. "Much Ado About Nothing." (?)
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