Intro To Munis: A Look At The Pros And Cons Of Municipal Bonds

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Municipal bonds, which are also commonly referred to as munis in the financial and investment world, can be a worthy investment if you are looking to see compound investment growth. These bonds are most often used to establish funding for certain "municipal" projects, such as building a new city park or revamping a location's public sewer system. These bonds can be made available by everything from public school systems to utility companies and everything in between. Therefore, they can usually be easy to find, especially in larger urban locations. Here is a look at some of the pros and cons of munis to help you get more familiar. 

Pro: Different Types of Munis Are Available, Which Aligns With Varied Investment Ideas. 

If you are looking for a secure bond with a low-interest rate that may provide a quick return, general obligation (GO) muni bonds are a good choice. If you are on the lookout for a more long-term investment with the potential for a passive income stream later in life, revenue bonds work out well. You have options with munis, so it tends to be simple to get what you need from the investment. 

Con: Interest Rates Can Affect the Face Value of the Bonds.

If you intend to hang onto your purchased munis for the long term, or at least until they mature, you will not be so concerned with unstable interest rates. However, for short-term investors, interest rates are a concern. If interest rates spike, the bonds value if you decide to sell can drop significantly. This is one reason why it is best to invest in more stable munis with as close to a fixed interest rate as possible. 

Pro: Munis Are a Tax-Free Investment.

Perhaps one of the biggest advantages of municipal bonds is the fact that they are tax-free. If you are already high income and in a higher tax bracket, investing in munis can save you some money when you file your taxes. When paired with something like a pension fund, munis can really beef up your profile and give you a break from huge tax bills. 

Overall, munis are a straightforward investment that can give you options, but you do have to look at downfalls to make sure you are putting your money where it really should go. If you need help with learning more about these tax-free bonds, reach out to a municipal bond tax adviser, like Alan Z Appelbaum, for help.

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