Understanding municipal bonds
For investors who seek tax-free income as part of their investment mix, municipal bonds may provide a helpful option. One easy way to invest in municipal bonds is through mutual funds — we'll talk more about mutual funds a bit later. First, here is some background on how municipal bonds work.
A municipal bond can be considered an IOU. It certifies that the buyer of the bond has loaned money to a state, city, or local government, and describes the terms of the loan. Among other things, the terms of the loan specify three things: the principal amount of the loan, the interest rate payable (usually a fixed rate), and the future date on which the principal amount will be repaid.
Municipal bonds offer investors a chance to play an integral role in the nation's economic development, providing financing for projects administered by state and local governments. Municipal bonds are often backed by revenues from the specific municipal project being financed (a toll bridge, for instance), or the general creditworthiness of the issuing body.
A key feature: tax exemption
Among the features of municipal bonds is a steady stream of income that is generally free from federal taxes (and often free from state taxes). Additionally, when compared to many other types of securities, municipal bonds carry relatively low risk. Historically, municipal bonds have had very low default rates, owing partly to the fact that states and municipalities are required by law to balance their budgets. What's more, states and municipalities generally have no right to file for bankruptcy.
What types of projects do municipal bonds raise money for?
As mentioned above, municipal bonds are issued by states, state agencies, and local governments. The money that is raised is used for many types of projects, including the development and maintenance of hospitals, airports, utilities systems, and school districts. Other examples of municipal projects include the operation of convention centers, water treatment plants, and water distribution systems.
Access to the municipal bond market
Individual municipal bonds can be purchased directly from registered dealers, but mutual funds offer more-affordable access to a portfolio of municipal bonds. In addition to tax exemption, other features of municipal bond funds include:
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monthly income — Many bond funds pay dividends on a monthly basis, providing the potential for steady income.
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a diversified mix of bonds — By holding many bonds, mutual funds help reduce risk that any given bond will fail to meet its responsibilities.
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low minimum investment — Buying individual bonds might require tens of thousands of dollars at the time of the initial investment. With mutual funds, the minimum initial investment is usually substantially less.
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professional portfolio management — Municipal bond funds are usually managed by experienced investment professionals, following thorough research processes.
The sheer number of available municipal bonds may make an investor's job challenging; from such an expansive field, it's not always easy to select the most fitting bonds to invest in. Mutual funds, however, provide a straightforward and simple way to help you include municipal bonds in your broader investment plan. As always, please remember to talk to your financial advisor before making any changes to your investment mix.
Click here for information about the wide range of municipal bond funds available at Delaware Investments.
Important information
Investing involves risk, including the possible loss of principal.
Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer's ability to make interest and principal payments on its debt. Fixed income securities may also be subject to prepayment risk, the risk that the principal of a fixed income security may be paid prior to maturity, potentially forcing a strategy to reinvest that money at a lower interest rate.
Funds that invest primarily in specific states may be more susceptible to economic, regulatory, and other factors of those states than funds that invest more broadly.
Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.
Diversification may not protect against market risk.
Carefully consider a Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus, which may be obtained by clicking here or calling 800 523-1918. Investors should read the prospectus carefully before investing.
This article is for informational purposes only and is not meant to predict actual results. Information in this article should not be construed as financial advice. Please consult your tax professional regarding your specific situation.
The Funds are distributed by Delaware Distributors, L.P., an affiliate of DMHI, and MGL.
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