Mutual Fund And Municipal Bonds
In the last few months, yields from municipal bonds have been higher compared to yield from US Treasury bonds. This has increased interest among investors. However, investors are now wondering whether they should opt for individual municipal bonds or go for bond mutual funds. |
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When you compare mutual fund and municipal bonds, at least the investor can be assured that he will receive his principal amount back when the bond matures. In contrast, a mutual fund does not mature and there is a lot of uncertainty when it comes to the share price of fund in the future.
However, for most investors getting the principal amount back is not their main concern. They are worried how inflation would affect their purchasing power once they get the principal back after the bond matures.
Therefore, to maximize future buying power, investors have to reinvest the interest income that they get from individual bonds. This means continuous purchasing new bonds at the prevailing rate. But in a bond mutual fund, the interest income is automatically reinvested and this helps to balance out the inflation.
However, with individual municipal bonds, the investor has control over his portfolio and can make all the necessary buying and selling decisions. This power is not there with bond mutual funds as all decisions are taken by the fund manager.
It has been seen that investors who have large portfolios actually benefit from individual municipal bonds. Therefore, those who are looking to make their own decisions and do not mind paying transactions cost should opt for individual municipal funds. On the other hand, investors who are looking for professionally research securities and low transaction costs should go for bond mutual funds.
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