Municipal bonds are the bonds that are issued by the states backed by specific revenue streams in order to bring up some investments in the infrastructure or for a specific purpose say augmentation of the Chicago airport backed by the United Airlines. That said there are significant advantages and disadvantage of investing in the municipal bonds, In fact all the more people are wondering whether tax free is actually a good thing to have. Well in the falling economy these bonds are definitely very good.

 

Now these munis are free of any federal tax as well as any state taxes so it a good investment. These bonds generally have a very good credit quality and are much better than the corporate bonds as well as the taxable bonds. If you live in California then the California tax free municipal bonds are definitely the way to go as the California taxes are one of the highest in the country so it makes sense to avoid the taxes at any cost.

 

Now you can invest in the California tax free bonds or the California tax free munis even if you live in another state but then you will be only be able to avoid the federal tax and if you live in California and then invest in the California tax free bonds then you will be able to save the federal tax as well state tax. In fact you can try for the Massachusetts tax free munis or any other state based on where you live.

This is very easy and the best way to go doe it is opening up an account with the treasryrditect.gov or you can in fact buy the mutual funds that invest in these munis. These funds are the American Funds RTCFX, TAFTX, TECFX or the Vanguard CA tax free VCADX or the Schwab tax free SWCAX. ETF’s or the electronically traded funds are called the ETF’s and there are California tax free ETF’s. Another good one is the Fidelity Intermediate Municipal Income or the FLTMX. The best way to invest in muni bond is through the tax free closed ended funds. These funds are available at discounts in times of recession. Another option is the ishares S&P California municipal bond fund.

Again always ask for the yields on the tax free bonds as the yields depend on the state of the economy and these muni tax free bonds always carry some amount of interest rate risk. You can definitely go in for the fixed rate bond funds or the floating rate muni bonds/. In general the state tax free munis are AAA rated but again the way these are backed up by the state government these states can go into default and then the bonds can become very risky.

Another alternative is the zero coupon bonds which have no interest but they definitely are given at the deep discounts to the face value