Munis can be a less taxing investment

Tax-exempt municipal bonds and bond funds are looking attractive to investors who’ve grown weary of dismal stock returns, shaky corporate balance sheets and heavy personal taxes.

The current returns may not make your heart beat more rapidly, but they’re unlikely to reflect any traumatic news that will send you to the cardiac unit either.

Issued by cities and local agencies to raise cash for a variety of projects, they’re a comparatively conservative investment whose creditworthiness and stability tend to be better than that of taxable corporate bonds.

Of course, you must still contend with credit and interest rate concerns. But the worst performing municipal bond fund last year lost 1.8 percent, while the worst performing taxable bond fund tumbled 25 percent. You must usually be in a 28 percent or higher federal tax bracket before a municipal bond’s taxable-equivalent yield exceeds what can be earned from a taxable bond.

(To determine that, divide the muni’s yield by 100 minus your tax bracket. The answer is the taxable bond yield you’d need to surpass the muni’s.)

“Anyone in a high enough bracket should seriously consider investing in tax-exempt bonds,” said Harold Evensky, certified financial planner with Evensky Group in Coral Gables, Fla.

Stay in the short-to-intermediate range of four to five years in duration and “ladder” your individual bond portfolio with different maturities, he said. Or, if you can only afford a smaller minimum, diversify by investing in municipal bond funds.

The top tax-exempt intermediate-term national bond funds in total return (yield plus appreciation of underlying bonds) over the past 12 months, according to Morningstar, have been:

American Century High-Yield Municipal (ABHYX); $35 million; “no load” (no sales charge); $5,000 minimum; 30-day yield 5.15 percent; average bond duration 6.6 years; credit quality below investment grade; 800-345-2021; 8.11 percent.

First Investors Insured Intermediate Tax-Exempt “A” (FIITX); $13 million; 6.25 percent load; $1,000 minimum; 30-day yield 3.29 percent; average duration 6.44 years; average credit quality AAA; 800-423-4026; 7.15 percent.

Baird Intermediate Municipal Bond (BMBSX); $660,000; no load; $2,500 minimum; 30-day yield 3.77 percent; average duration 5.77 years; average credit quality AAA; 800-792-2473; 6.86 percent.

“It’s shaping up to be a decent year for tax-exempt bond funds because interest rates haven’t been raised and potential for rising rates now looks to be further down the road,” said Scott Berry, analyst with Morningstar.

Over the past 12 months, national long-term municipal bond funds rose 5.4 percent, intermediate-term 5.6 percent and short-term 4.4 percent, noted Berry. The longer term the bond, the greater the potential volatility.

The best tax-exempt long-term national bond funds in total return over the past 12 months were:

– Nuveen High-Yield Municipal Bond “R” (NHMRX); $7 million; no load; $3,000 minimum; 30-day yield 6.42 percent; average duration 7.86 percent; credit quality below investment grade; 800-257-8787; 11.06 percent.

– PIMCO Municipal Bond “A” (PMLAX); $26 million; 3 percent load; $2,500 minimum; 30-day yield 3.59 percent; average duration 8.5 years; average credit quality AA; 203-352-4900; 8.14 percent.

– First Investors Insured Tax-Exempt II (EIITX); $38 million; 4.75 percent load; $1,000 minimum; 30-day yield unavailable; average duration 7.6 years; average credit quality A; 800-423-4026; 8.09 percent.

“We’re looking for a moderate rise in interest rates that reflects a moderate economic recovery,” said Clark Wagner, director of fixed income for First Investors Insured Intermediate Tax-Exempt “A” and Tax-Exempt II. “The muni market will remain fairly firm so long as the stock market doesn’t present much of an alternative, but we anticipate stocks will do better as the economy improves this year.”

Tax-exempt money market funds are also designed to save on taxes, but don’t expect much of a return.

. The top tax-free nationally available money market funds with moderate minimums and availability to individual investors, according to iMoneyNet Inc., are:

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– Vanguard Tax-Exempt Money Market Fund; $3,000 minimum; 800-662-7447; seven-day compound yield of 1.57 percent.

– Strong Municipal Money Market Fund, $2,500 minimum; 800-368-3863; 1.38 percent.

– Fidelity Municipal Money Market Fund, $5,000 minimum; 800-544-6666; 1.36 percent.