What Are Some Disadvantages of Municipal Bonds?
Municipal bonds are one of the more conservative asset classes available to investors. While they do have a place in many portfolios, they have some disadvantages, and investors should discuss these with a financial adviser prior to investing in municipal bonds.
Other People Are Reading
-
Biggest Advantage
-
If you live in the municipality that issued the bonds, you are exempt from local, state and federal taxes on your investment. For example, if you're a resident of California and you buy California bonds, your investment is tax free.
Disadvantage 1: Conservative Investments
-
As is the case with most bonds, municipal bonds rarely provide the returns that stocks and riskier asset class provide.
-
Disadvantage 2: Low Interest Rates
-
Municipal bonds typically carry low interest rates that can be lower than CDs or Treasury bonds when the economy is good.
Disadvantage 3: Interest Rate Risk
-
All bond investments are subject to interest rate risk. If interest rates fall after you've purchased a bond issue, the value of your investment falls because cheaper bonds can now come to market, meaning that it will be difficult to find buyers for your bonds for the price you want.
Conclusion
-
Municipal bonds certainly aren't the worst investment options in the world, but they are probably geared toward investors looking for income, not capital appreciation. Therefore, if you're appetite for risk is high, these aren't the investments for you.
-
