Municipal bonds are debt securities issued by the government to fund its obligation. Investors can receive regular interest payments along with the return of the principal by investing in this bond. The maturity date of the municipal bond can be years into the future. However, generally, a short-term bond is anywhere between 1-3 years, whereas long-term bonds can be more than a decade. The specific time frames can vary depending on the bond.
The government can issue a variety of municipal bonds, and each comes with its benefits. Therefore, learn what these common municipal bonds are from the following sections and understand their offered benefits.
Common Types of Municipal Bonds
Some of the most common kinds of municipal bonds include the following:
Revenue Bonds
These bonds are issued to collect funds for particular projects and are backed by their revenues. These are the riskier municipal bonds because the interest payments are dependent on the revenue made by these projects. At the same time, these have some of the highest interest rates, which makes them an attractive option for several investors.
General Obligation Bonds
These bonds are also called GO bonds and are supported by the government’s taxing power. These are some of the safest investments, and the funds collected from the general obligation bonds are used to finance roads, schools, and other infrastructures. The bonds are then repaid utilising the government’s operating budget. At the same time, this investment has a low interest rate, which makes it suitable for risk-averse investors.
Benefits of Investing in Municipal Bonds
The following are some of the benefits received from investing in municipal bonds:
Tax Benefits
Indian municipal bonds provide tax exemption on the interest income. The interest earned is completely tax-free, which increases the investors’ after-tax yield.
Steady Income Stream
Municipal bonds are well-known for their predictable income stream provided through interest payments. It is a great choice if you are looking for stable returns over an extended time.
Attractive Yields
Generally, municipal bonds offer competitive interest rates, which give investors an opportunity to have high yields.
Diversification
Municipal bonds are a strategic way of diversifying your investment portfolio. They have a low correlation with other asset classes, such as corporate bonds and equities. So, they assist with mitigating overall portfolio risk.
Wrapping Up!
Investors can hold municipal bonds for anywhere from one year to several decades. These can be both short-term and long-term investments, depending on what you are looking for. They bring several benefits and provide an opportunity for people to contribute towards the country’s infrastructural development. However, it also has a few risks related to it, such as liquidity, call, interest rate, and credit risk. As long as one is careful of these factors and knows what they are getting into, municipal bonds can be an incredible choice.
FAQs About What is a Municipal Bond?
1. How are municipal bonds a credit risk?
Defaults are uncommon with the government, but they can occur once in a while, especially if the bonds have been issued for a weaker financial profile. As such, do your research into the issuer’s creditworthiness and then invest in their bonds.
2. What are SEBI’s guidelines on the municipal bonds?
SEBI has released several guidelines for these bonds. One of these is that the municipal bodies must not default on debt instruments or loan repayment received from financial institutions in the previous year. This ensures that the municipalities have a clear record of meeting the necessary financial requirements.
3. Who should invest in municipal bonds?
Municipal bonds are great for income-oriented, tax-efficient, and risk-averse investors. It is also the right choice for anyone whose needs and preferences can be met by these bonds.
