Municipal Bond Funds

Municipal bonds, or munis, are debt securities issued by states, counties, cities, agencies and local districts to finance capital and infrastructure projects, such as roads and bridges, schools, administrative buildings and other public projects. Interest on most municipal bonds is exempt from regular federal income tax in addition to the state and local income taxes in the state or locality where they are issued.¹ Some municipal bonds are also exempt from income tax in other states.

Why Invest in Municipal Bonds?

Muni bonds historically have had very low default rates compared to other types of bonds because they are issued by governments or their legal authorities. This has made them a compelling choice for investors seeking a reliable source of income that is also usually free from regular federal income tax. On an after-tax basis, municipal bonds typically yield more than taxable alternatives.

Types of Municipal Bonds

Franklin Templeton offers national and state-specific munis. Each possess their own characteristics, level of risk and tax treatments.

1. For investors subject to the alternative minimum tax, all or a portion of the interest may be taxable, depending on the investment. Distributions of capital gains are generally taxable.

Bond Funds or Individual Bonds?

Just as equity investors can invest in individuals stocks or in stock funds, muni investors have the option of buying individual municipal bonds or muni bond funds. Both options have their advantages and disadvantages.

Muni funds generally offer a wide diversification of credit risk, an important consideration when investing in debt securities. Individual bonds often must be purchased in large dollar amounts, which may potentially put them out of reach for certain investors, while bond funds can be purchased at a relatively small minimum investment.

Depending on the issuer, individual bonds may be difficult to sell prior to maturity, which may negatively impact the price received. Bond fund shares, by contrast, can usually be sold daily (or intraday in the case of ETFs²) at the prevailing market price. Bond funds may also benefit from professional investment management.

2. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns.

Active Research Matters

An active, research-driven approach is critical given the vast size, nuance and complexity of the municipal market. Our deep team of research analysts conducts comprehensive analysis of every opportunity across all sectors in the municipal bond universe, covering the quality spectrum in both primary and secondary markets.

Seek Relative Value Opportunities

We seek to identify and capture attractive relative value opportunities by carefully analyzing and managing yield curve positioning, credit spreads and coupon and call structures to help deliver tax-efficient portfolios, while aiming to provide attractive risk-adjusted returns.

Emphasis on Risk Management

Our team places a premium on risk management which is incorporated fully within our deep credit research process, portfolio construction process and with an independent risk management team, enabling us to better understand, quantify and optimize where we allocate risk across our portfolios.

Experience and Expertise

With more than 40 years of municipal bond investing experience and a seasoned team of over 30 investment professionals, we have one of the largest and most tenured teams in the industry.

3. Information as of 09/30/20.