How do you buy bonds?

[disneysteve]

So if you live in New York and buy a municipal fund that’s over-indexed on California, you’re not making the most of your investment.

True, but you could buy a NY muni bond fund.

I guess it would be critical to know if you get the same tax benefits from owning the fund that you would get from owning individual bonds.

[AJ444]

True, but you could buy a NY muni bond fund.

I guess it would be critical to know if you get the same tax benefits from owning the fund that you would get from owning individual bonds.

I own VWIUX Vanguard Intermediate Term Muni and I don't pay federal taxes on the interest. I understand the tax benefit for the interest is the same as it would be holding an individual bond that is in the fund. Capital gains are taxable however.

I do have to pay state taxes on the interest, Vanguard doesn't offer an Illinois specific muni fund but I wouldn't touch it with a 10 foot pole if they did given the state debt crisis.

Straight from Vanguard:

"Because the income dividends from municipal money market and bond funds generally aren't federally taxable, these funds typically have lower yields than taxable money market and bond funds. Even so, if you're in one of the upper marginal tax brackets—and especially if you live in a state or locality that has high income tax rates—municipal money market and bond funds are likely to provide you with higher after-tax income than would taxable funds with similar characteristics. (Even tax-exempt funds, however, can distribute short- and long-term capital gains, which would be subject to tax.)"

https://personal.vanguard.com/us/insights/taxcenter/tax-exempt-funds

[kv968]

True, but you could buy a NY muni bond fund.

I guess it would be critical to know if you get the same tax benefits from owning the fund that you would get from owning individual bonds.

Owning a muni bond fund that holds issues from your home state will have the same tax benefits as holding individual bonds (i.e. hold a NJ muni bond fund and live in NJ and pay no NJ or federal taxes on the income).

[~bs]

Owning a muni bond fund that holds issues from your home state will have the same tax benefits as holding individual bonds (i.e. hold a NJ muni bond fund and live in NJ and pay no NJ or federal taxes on the income).

That's a good point, note that only the much larger states tend to have muni bond funds dedicated to them. For people living in other states, the bond funds will tend to be a mix of all 50 states.

While there is tax benefit to owning your home state bonds or bond fund, personally I'd be wary of owning large amounts of your home state bonds for the reason that AJ444 mentioned.

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The mutual fund fact sheet provides the breakdown of the % interest state tax exempt by state.

[scfr]

Thanks, everyone. It sounds like bond funds are the way to go for various reasons. It also sounds like there are many more options in bond funds if, for some reason, someone wants to focus on a particular area/sector/maturity/whatever. Our current investment is mainly in a total bond market index. I think I'll stick with that.

I know I'm really late to this discussion, but over the years I have investigated buying individual muni or corporate bonds several times but have always come to the conclusion that bond funds are the better bet.

Now on the other hand, I know this probably isn't what you were talking about when you referred to "bonds," but buying individual US Treasuries (TIPS, notes, bonds) is very easy and is something I do. Setting up a Treasury Direct account is easy and there are 0 fees.

[narnolia]

Here are some specific factors to consider when choosing a bond fund:-
Start with expenses: Expenses make a big difference to any investor, but they're particularly important when you're evaluating bond funds. Look for a fund with average or below-average expenses.

The lower the risk, the more expenses matter: - Riskier bond funds have higher potential returns, but not necessarily higher expenses. Fund expenses are related to costs, not returns.

The lower interest rates are, the more expenses matter:- Low interest rates mean your fund's income stream will be lower-- which also magnifies the impact of that expense ratio.

When might investment in bonds be for you?
You want to invest a lump sum – usually at least £5,000
You can tie up your money for at least five years
You are comfortable with the fact that the value of your investment can go down as well as up and you may get back less than you invested.