Asked by Michael  |  Submitted October 21, 2013

What is the downside to tax-free bonds?

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  Answers  |  1

October 22, 2013

The major downside risks for investing in bonds are credit risk and interest rate risk. This is true of all bonds, not just tax free bonds. Credit risk needs to be examined carefully when investing in municipal bonds. There are many different types and the credit risks can be significant. The bonds will also "market to market" based on current interest rates, so investors need to be aware of this risk also. Investors also need to consult their accountant to make sure they are in a tax bracket that justifies investing in tax free municipal bonds. For the vast majority of investors, a mutual fund is the best way to invest in tax free bonds. Low cost providers like The Vanguard Group would be a good place to start.

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