Investing in mutual funds

[Bcp1984]

All,

So I have been consdering a mutal fund in addition to the one I currently own. A friend turned me on to it a few months back, the symbol is AMHIX. he has seen admirable growth in his account, far more than i have seen in my sdavings with 10 times as much money than he has invested. however, can someone explain to me exactly what a municipal bond is? would this be a good invest ment for 2-3 year growth without much risk? Thanks for any insight you can provide- Jeff, Steve, and others.

-Brandon

[disneysteve]

AMHIX is a municipal bond fund from American Funds. My first warning, and the reason I would NEVER consider investing in this fund, is that is has a 3.75% front end load. That means for every $100 you invest, you instantly lose $3.75 to the sales commission. Your investment then has to earn 3.896% just to break even!

As for what a municipal bond is, that is a debt issued by a state, city or local government entity. They sell bonds to raise money for operating expenses or particular projects like a new bridge, a stadium, or some other infrastructure project. Interest from municipal bonds is federal-tax exempt. If you live in the state issuing the bond, the interest may also be exempt from state taxes. If you sell the bond at a profit, though, capital gains are taxable.

Municipal bonds are generally safer than corporate bonds because a municipality is less likely to go bankrupt than a private company.

[EEinNJ]

Generally, muni bond funds are better suited to people in higher tax brackets, who need to shelter the interest income.

I agree with Steve that the load on that fund rules it out, anyway.

I have to disagree that a municipality is less likely to default. States like Ca. and NJ are already broke, and the ratings of their bond reflect that. There are many corporations that have better credit ratings.

The bond market is headed for a pull-back at least, worse if you listen to Bill Gross from Pimco. A lot of money is already leaving bond funds.

With only a 2-3 year horizon and not wanting to take much risk, there aren't many choices besides CD's.

[Hector]

I would go for dividend paying stock instead of bond in current situation.

I agree with others: 3.75% front end load fees is insane.

[snafu]

There is a level of risk in any investment including CDs, T-bills and Money Market MFs via how much buying power they eliminate. Why not explore the possibility of an Index MF from Vanguard or similar low fee fund. Depending on the sum to be invested, look at a Large Capitalization Value Exchange Traded Fund [ETF] [from a discount brokerage] since their holdings pay higher dividends. Can you stretch your time frame to 5 years? Mutual funds and ETFs can be cashed out if you want your money.