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