muni bond funds?


E

ellen miller

hi all,

i recently inherited $20K. All of my retirement is in 401k's and
ROTH IRA's and I'm set to max out both again this year. i'm diversified
(small caps, s&p 500, international and a few REITs).

i was thinking about buying a municipal bond fund since this money won't
be going into a tax-free account.

fidelity has one for ohio (my home state) that over the last 10yrs has
earned at least 7% on average.

with interest rates being hiked - i think the nav will probably fall.

i've got a good friend in real estate who's a mortgage lender. his
company buys a report that has done a very good job of predicting
interest rate hikes & cuts.

they think we're due for at least one or two more hikes and that
at the end of the year (or early 2007) they'll begin cutting
again.

do muni bond funds hold up well in this sort of interest rate environment?

I understand that no one can predict the future and read the mind of the
Federal Reserve but I would be interested to hear what others think.

-Ellen
 
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E

Elle

I am assuming you have also considered paying down a
mortgage; have no credit card debt; have an emergency fund;
and that your Ohio and federal taxes would take a chunk out
of any income (gains, distributions, etc.) from a mutual
fund. If so, then based on general allocation guidelines I
agree having a high grade bond position in your portfolio is
a good idea. IMO, intermediate term or longer high grade
bond funds right now are only for people who are going to
buy and hold a long time. This is because I think we're
still at pretty low interest rates and concur with your
concern about NAVs of such funds falling. On the other hand,
the chart below might give a little more perspective:
http://finance.yahoo.com/q/bc?t=my&s=FTHRX&l=on&z=m&q=l&c=fohfx

FOHFX has wider swings because, as you have probably
observed, it has a longer duration and average maturity.

I don't think you can go wrong with this fund (assuming
we're talking holding it a long time and reinvesting of
dividends), unless you want to explore other Ohio municipal
bond funds with possibly lower expense ratios. I see
Vanguard offers VOHIX, with a much lower expense ratio, for
example. (Dunno if you're already with Fidelity and so using
Vanguard is convenient to you. VOHIX has a shorter duration
and average maturity, which should be to your advantage in a
rising interest rate environment. Vanguard also has an Ohio
money market fund with the same tax benefits that is worth
considering, again in view of the possibility rates are
still on the low side now. You could split between the two
bond funds.

Watch out for fund minimums and annual fees. I didn't check
those. The web sites at Fidelity.com, Vanguard.com, and
finance.yahoo.com are worth learning how to navigate a
little, to assist your research, if you don't use them
already.
 
B

BMS

You may want to consider a floating rate bond fund in this raising rate
environment.

The Hartford, Eaton Vance for 2 have good funds.
 
P

Paul Michael Brown

Intermediate term or longer high grade
bond funds right now are only for people who are going to
buy and hold a long time. This is because I think we're
still at pretty low interest rates and I concur with your
concern about NAVs of such funds falling.
To be sure, if interest rates rise the original poster will see a decline
in her NAV.

BUT . . . if the OP holds on to the fund for the long term, and reinvests
the dividends, the risk to principal is acceptable. As with mutual funds
that invest in equities, the best approach is to use dollar cost averaging
and buy shares on a regular basis.
I don't think you can go wrong with this fund (assuming
we're talking holding it a long time and reinvesting of
dividends).
Again the secret is to hold the fund for the long term and to ignore
fluctuations in the NAV. If the OP is not willing to do this, she should
stick to a municipal money market fund. Of course, the yield on such a
fund would be lower.
Watch out for fund minimums and annual fees. I didn't check
those.
With $20K, it shouldn't be a problem meeting the minimum account size. I
agree that it's important to shop around for a fund with low expenses.
When your yield is only three percent or so, even a few basis points makes
a difference.
 
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E

ellen miller

BMS said:
You may want to consider a floating rate bond fund in this raising rate
environment.

The Hartford, Eaton Vance for 2 have good funds.
I will look into that & the Vanguard fund for Ohio that Elle mentioned.
Yes, I'm debt free and max out all my possible retirement accounts.

I'm not a very active trader or investor, I tend to be very passive.

It looks like this money won't be in my possesion for another 3 months
so perhaps the NAV will fall some to my advantage between now and
then.

Thank you everyone for your responses.

-ellen
 

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