As investors strive to maintain the right balance of diversification in their portfolios, a mix of stock and bond mutual funds is critical. Within fixed income, there are certain bond mutual funds that may be attractive to investors, if appropriate, and can complement a portfolio seeking tax efficiency. One subset of bond mutual funds are tax exempt municipal bond funds.
Issued by states and local governments, individual municipal bonds are used to fund the construction of public projects such as schools, highways, water and sewer systems, bridges and hospitals. When you invest in municipal bond funds, you’ll have access to distinct potential investment benefits as well as the opportunity to support many of the communities we live and work in.
ADVANTAGES OF MUNICIPAL BOND MUTUAL FUNDS
At Dreyfus, we believe municipal bond mutual funds offer distinct advantages1:
The $3.8 trillion municipal bond market is complex and vast, including thousands of issuers and dealers. Professional bond managers have the resources and expertise to conduct credit research on individual bonds and provide efficient execution on specialized trading desks.
Liquidity refers to how easy it is to convert your assets to cash. Some bonds are more liquid than others, which may make selling certain individual bonds challenging. You can generally sell shares of a bond mutual fund at any time at the current market value (or NAV) of the fund.
More Frequent Income Payments
Most municipal bond funds pay out monthly income distributions, while individual bonds typically only pay out income semi-annually.
Professionally managed bond mutual funds tend to get better pricing when buying and selling bonds, where they can often purchase bonds in larger blocks with more attractive pricing (known as bid/ask spreads) than an investor buying individual bonds.
THREE REASONS TO CONSIDER TAX-EXEMPT MUNICIPAL BOND FUNDS
1. TAX BENEFITS
Taxes can take a big bite out of your investment returns. That’s why so many investors look to municipal bonds to provide a steady stream of tax-exempt income. The income on most municipal bonds is exempt from federal taxes—and if you live in the state the bond is issued, your interest income may also be exempt from state income tax.
Municipal bonds tend to have lower stated yields than comparable taxable bonds, but they make up for it with the potential to generate higher after-tax returns and after-tax income. This means the yield from a taxable bond needs to be significantly higher than the yield from a municipal bond in order to generate the same amount of income after federal income taxes.
As the chart at left illustrates, an investor in the 35% federal tax bracket considering a 5% municipal bond would need to find a comparable taxable bond with a 7.69% yield in order to pocket the same amount of income after taxes.
A municipal bond investment can be an important component of a diversified portfolio. While equity mutual funds offer long-term growth potential, they can be volatile. Historically, municipal bonds have demonstrated a low correlation to U.S. equities and taxable fixed income assets, making them a potentially attractive component for diversifying portfolios.2 A portfolio allocated among different asset classes may help lessen the risk associated with investing in a single asset class.
3. LOW VOLATILITY
Municipal bonds are owned primarily by individual investors, who tend to hold their bonds to maturity rather than actively trading them. This has historically resulted in lower volatility for municipal bonds versus equities and other fixed income investments, including Treasuries.
STANDISH'S SPECIALIZED EXPERIENCE IN MANAGING MUNICIPAL BOND MUTUAL FUNDS
Dreyfus offers an extensive selection of municipal bond funds managed by Standish Mellon Asset Management Company, LLC (Standish), a wellestablished BNY Mellon subsidiary dedicated to serving sophisticated fixed income investors. Their investment strategies span the wide range of fixed income disciplines and are complemented by an ability to design innovative, effective solutions to satisfy clients’ evolving needs. With $27 billion in municipal assets and $152 billion in total fixed income assets under management as of September 30, 2016, we believe Standish has the experience and resources to navigate the $3.8 trillion U.S. municipal bond market:
- Specialized, in-depth municipal credit research
- Institutional power to buy and sell bonds at potentially favorable prices
- Seasoned investment team with 20+ average years of investment experience
- Independent risk management systems and models
The Standish tax-sensitive team conducts extensive research to identify municipal bonds with stable or improving credits. Working closely with a dedicated trading desk, the team’s primary objective is to capture compelling opportunities in an often-fragmented marketplace.
There are many municipal bond fund options to choose from, but which one is right for you? Contact your financial advisor or call 1-800-DREYFUS to speak with a representative to learn more.