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A millionaire writes: "How do I use your fund evaluator to get your suggestion
for a higher yielding tax-exempt fund?"
You could go to the Fund Finder box (where
it says "enter any part of the fund name") and type in "high-yield" (without
the quotes) and look through the list of funds that shows up for tax-exempt
or municipals, of which there are several. (Note: If you are in a high-tax
state, you will want to buy a fund that invests only in your state's obligations.)
You have three basic decisions to make, it seems to me:
1. Do you really want to be in tax-frees at all? (Sounds like
you do, and that's fine. These days, tax-free bonds yield almost as much
as taxable Treasury securities. So -- especially if you're in a high-tax
state and buy safe "general obligation" bonds issued by that state --
your after-tax return from municipals (as tax-free bonds are known) could
compare very well with other fixed income investments, like taxable bonds
or certificates of deposit or savings accounts.)
2. Do you want to invest in long-term bonds or short-term? (Huge
difference. The first is a somewhat risky bet that interest rates will
fall, or at least not rise much over the long run. The second is a convenient
parking place for some dough until better opportunities come along.)
3. Do you want to invest via a fund or directly in bonds themselves.
If you were a little guy, investing under $100,000, say, I wouldn't recommend
buying bonds yourself. But you're not a little guy, so you may not want
to give up the management fee that a fund charges . . . nor give up control
over the specific kinds of bonds it buys. For example, you might prefer
bonds with a specific maturity date. Or you might prefer bonds with an
even lower level of risk than the ones the fund may sometimes buy to boost
its yield (and, thus, boost its ability to attract new customers). The
commission/spread you pay to invest in municipal bonds directly can be
high, especially when it comes time to sell. But if you buy bonds that
mature around the time you expect to need the money, you may avoid all
sales costs by just waiting until they are redeemed.
As with anything, before buying municipal bonds, be sure you understand
what you're doing, what their call provisions are, and how much of a haircut
you might have to take if you needed to sell them before they expired.
The market for something like New York City general obligation bonds is
deep, and even a full-service broker won't gouge you too badly. But for
some obscure dormitory, toll-road or hospital issue? That's another story.
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