Tuesday, July 5, 2011

Are Muni Bond Funds a Good Investment?

An EPJ reader asks:
You often say that no one should presently own municipal bonds.   Does the same apply to muni MMF?  Lots of investors in the top tax bracket use muni MMF as their sweep account.  Perhaps you could answer as a post as I am sure many readers are thinking this same question.  By the way, the yield on muni and normal MMf are about 0.1% so the earnings hit is very small.
How risky a muni money market fund is, of course, dependent on what specific securities are held by a fund. That said, you should always look at investments in terms of upside versus downside. What the hell is the upside on a muni bond fund that is paying 0.1%? Beginning and end of story. At least for the present, you are much better off putting your liquid funds in a short-term a U.S. government money market fund, your upside is about the same as the MMF, but the Fed is much more likely to step in and protect the Treasury market, than they are some muni security---I'm not saying they won't, but with a muni your are rolling the dice. There's no payout if you win, but the potential for significant loss is there if luck is not with you.

I might answer the question differently if MMFs were yielding 20% at the present time, it might make sense if you are a risk taker, but given the puny return, there is no reason to be in this market.

No comments:

Post a Comment