A millionaire asked: “Tell me how I can make use of your fund calculator to choose a tax-exempt fund that is higher yielding?”
Go to the Fund Finder box (which states “enter any part of the fund name”) and enter “high-yield” (with no quotes) then browse through the listed funds that appears for municipals or tax-exempt, of which there are quite a few. (Note: If you are in a high-tax state, you will want to buy a fund that invests only in your state’s obligations.)
You have three basic decisions to make, it seems to me:
1. Do you really want to be in tax-free at all? (Sounds like you do, and that’s fine. These days, tax-free bonds yield almost as much as taxable Treasury securities. Note that if you are from a high-tax state and have purchased “general obligation” bonds issued by that state — your after-tax return from municipals (also known as tax-free bonds) could compare very well with other fixed income investments, such as certificates of deposit or taxable bonds or savings accounts.)
2. Do you want to invest in long-term bonds or short-term? (Huge difference. The first is a somewhat risky bet that interest rates will fall, or at least not rise much over the long run. The second is a convenient parking place for some dough until better opportunities come along.)
3. Do you want to invest via a fund or directly in bonds themselves. If you were a little guy, investing under $100,000, say, I wouldn’t recommend buying bonds yourself. But you’re not a little guy, so you may not want to give up the management fee that a fund charges . . . nor give up control over the specific kinds of bonds it buys. For example, you might prefer bonds with a specific maturity date. Or you might prefer bonds with an even lower level of risk than the ones the fund may sometimes buy to boost its yield (and, thus, boost its ability to attract new customers). The commission/spread you pay to invest in municipal bonds directly can be high, especially when it comes time to sell. But if you buy bonds that mature around the time you expect to need the money, you may avoid all sales costs by just waiting until they are redeemed.
As with anything, before buying municipal bonds, be sure you understand what you’re doing, what their call provisions are, and how much of a haircut you might have to take if you needed to sell them before they expired. The market for something like New York City general obligation bonds is deep, and even a full-service broker won’t gouge you too badly. But for some obscure dormitory, toll-road or hospital issue? That’s another story.