Tips for navigating municipal bond funds

Weathering muni fund investing

Here are some tips for profiting from municipal bond funds in a challenging time.

• Opt for national, diversified funds. These funds can diversify risks by investing in munis in 50 states. Conversely, single-state or local funds are more vulnerable. "But it depends on what state you're in," says Tuttle. "If your state has its fiscal act in order, that's OK."
• Avoid funds that hold munis subject to alternative minimum taxes. Alternative minimum taxes are special taxes that some municipal bonds carry that high-income individuals may have to pay. In fact, municipal bonds subject to alternative minimum taxes aren't really strictly defined munis. "They're issued for private purposes," Tuttle says. They are single-purpose bonds used to finance a project like a convention center or stadium.
• Scrutinize managers' track records. Fund managers should have 10 years of fund-management experience or more. And they will need every bit of it, because individual municipal bonds aren't as transparent as corporate bonds, making them harder to vet even for professionals.
• Look for solid track records over time. "Managers should consistently be in the top 25 percent of fund performers year after year," says Tuttle.
• Identify funds with low expense ratios. Fees make a difference in your return, says Ray Lucia, a Certified Financial Planner in San Diego. "We're talking about low yields," he says.
• Go for shorter-term maturities. To protect yourself from the risk of rising interest rates, which push bond prices down, opt for municipal bond funds that hold bonds with five- to seven-year time frames. "We don't think the extra yield for longer maturities is worth the risk," Ashburn says.

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