And with only a few now historic exceptions, municipal bonds for the most part are considered to be safe investments. Single-state municipal bond funds have fared nearly as well, returning a positive 1.58 percent over the same period. Highest Yielding Municipal Bond Funds Fund YTD 3-yr ann. That means an investor would have to earn 7.5 percent in taxable income on, say, an equity fund, in order to derive the same after tax benefit as earning a tax-free 4.5 percent. But muni funds also appeal to investors who desire a moderate return without lots of risk he said.
Muni bonds are a nice stable anchor.
Ill. But investors face an important decision. Some very large states, such as Texas, Illinois and Indiana have no state income taxes he notes. In those cases there's no overwhelming tax benefit to investing in a single-state muni fund. A diversified national municipal bond fund is the ticket for investors here he says. The benefit of owning a national municipal bond fund is that the portfolio manager can take advantage of opportunities across a broader geographic region and make adjustments to the portfolio based upon the supply of muni bonds in any one state or market, explains J. Scott Albrecht, vice president and senior portfolio manager of several municipal bonds funds at Federated Investors in Pittsburgh.