Tax avoidance and safety, Ens said are the main benefits of investing in municipal bonds. The higher an investor's tax bracket, of course, the greater the benefit. The possibility of a flat tax, still being debated in Washington, would lessen their appeal. For safety, Ens said , investors should buy bonds from at least four to five issuers. An option that requires a much lower investment is a unit investment trust, akin to a mutual fund but with a fixed number of shares and a fixed portfolio that does not change.
Investors usually pay a sales charge to buy unit trusts.
Or they can buy regular municipal bond funds, which are actively managed. There is rarely a sales charge for a bond mutual fund, but investors pay an ongoing management fee. Another disadvantage is that a bond fund never matures, which increases interest rate risk. Bondsonline Group, Inc., All rights reserved.