What is the advantage of investing in municipal bonds?

Investing in municipal bonds is a good way to preserve capital while generating interest. Most of them are exempt from federal taxes, and some are tax-free at the state and local level as well. 1 Municipal bonds, also called munis, help build infrastructure in your area.

What are the cons of municipal bonds?

Cons

• Munis may have low yields. Compared to the returns you can get with stocks, exchange-traded funds, or mutual funds, the interest rate on municipal bonds is low.
• Opportunity cost.
• They may not be liquid.

Are municipal bonds safe to invest in right now?

They are exempt from federal taxes, and they are relatively low-risk investments. On the plus side, highly-rated municipal bonds are generally very safe investments compared to almost any other investment. The default rate is tiny. As with any bond, there is interest rate risk.

Why are municipal bond funds falling?

Muni-bond prices have plunged amid concern about renewed inflation, a flood of supply from issuers and speculation that Congressional Republicans, after winning control of the U.S. House in the Nov. 2 midterm elections, will block aid to cities and states.

Are municipal bonds good in 2021?

Municipal bonds have been favorable among investors in 2021 for a few reasons, including competitive yield relative to other areas of the global fixed income market, new issuance, and pending infrastructure spending plans in DC.

Are municipal bonds high risk?

Buying municipal bonds is low-risk, but not risk-free, as the issuer could fail to make agreed-upon interest payments or be unable to repay the principal upon maturity.

Do you pay capital gains on municipal bond funds?

Capital gains on municipal bond investments are taxable as short- or long-term capital gains, depending on how long you have held the investment. Municipal bonds generally are not held in tax-deferred retirement accounts since the investment returns in these accounts are taxed as ordinary income upon withdrawal.

Can you lose money in a municipal bond fund?

These funds very rarely lose value, and the interest they pay is reliable. Because of this safety, they also pay very low interest. Risk and reward are always related: Lower risk means lower reward.