T Rowe Price Tax-Free Bond Fund Question

[Jazzmint98]

I have been putting about $300/month into an online savings account since I paid my car loan off in June 2009. I thought it would be best to start a "new to me" car fund, but with around 1% APY in that account perhaps a tax-free bond fund would be a better option. I don't anticipate buying another vehicle for at least 5 years.

I already have Roth IRA and other investments with T Rowe Price. I also have an emergency fund sitting in an online savings account.

Specifically, I'm looking at the MD Tax-Free Bond (MDXBX). It has an excellent Morningstar rating, no load, no redemption fee, and a low expense ratio.

I have never purchased bond funds in the past, so I'm hoping to get some advice as to whether this would be a more acceptable way to save given these conditions.

Thanks!

[Broken Arrow]

I don't have much to say about this, but I am wondering if you are from Maryland? If not, I am not sure how this would impact you, tax-wise.

Yikes! MDXBX is paying 4.37%? Wow, and it's tax-free?

I guess the only downside is that it has a normal market beta. In other words, the prices can and do fluctuate, and you could end up losing (or gaining) your money.

So, if you don't mind taking on some principal risk, I say go for it! If not, then I would stick with something like an online savings account with 2% APY right now. Interest rate is lower and it's taxable (but under long term capital gains), but at least your principal would be safe.

It's up to you.

[shultice24]

Excellent work on the proactive car saving!

As for the bond fund; I would be hesitant to suggest this as a vehicle for your savings in a relatively short time-frame. Municipalities will continue to face enormous financial challenges over the next few years, which could easily hurt a bond-fund's performance. I would think it would be safer than a stock fund, but there's always a chance you would be sitting on a capital loss when it's time to buy a new car.

Then again, if the fund is picky in selecting the highest-quality muni-bonds, it could very well turn out to be a great decision. It all depends on how risk-averse you are.

I think I've been in the econ program here at school too long- "on the other hand..."

[Broken Arrow]

Originally Posted by shultice24

I think I've been in the econ program here at school too long- "on the other hand..."

Well, that's not really a bad thing, because as you have observed, things are not always as simple as saying, "Bond funds are safer than stock funds" or vice versa. In the end, it does depend on the general composition of said fund and the fund manager's investment style....

That said, I agree that you don't really need a bond fund if you don't want. As I have suggested earlier, a simple online savings account would suffice. But plenty of choices as well, depending on what it is exactly, and the bond fund is another option.

[Jazzmint98]

Originally Posted by Broken Arrow

I don't have much to say about this, but I am wondering if you are from Maryland? If not, I am not sure how this would impact you, tax-wise.

No, I don't live in Maryland. I guess I will have to call to find out if it would benefit me to do this.