What are the benefits or advantages of investing in tax-free municipal bonds?
Tax benefit is one of the major advantages or benefits of tax-free municipal bonds. Secondly, if you are an active bond trader, you can also benefit from the interest rate fluctuations, provided you know how to trade on bonds, taking the maximum profits. Thirdly, the tax-free municipal bonds are issued by government bodies, hence they are considered to be risk free. Fourthly, you know exactly how much money will you receive and when. So there is no uncertainty. Though price of bonds may fluctuate if the interest rate changes. What are the risks associated with tax-free municipal bonds? The pricing risk or interest rate risk. So if the interest rates fluctuate a lot and you are looking for trading on these tax-free municipal bonds, then you may have to book a loss. Also, one needs to be careful about the tax benefit that he is getting. If an investor is in 30% tax bracket and buys a taxable bond paying 5% interest or coupon, then he would effectively get only 3.5% after tax deduction. H
