If you’re investing in municipal bonds or a muni fund for income, consider a closed-end muni fund instead. Such funds hold a mix of bonds yet they trade like stocks, usually on an exchange. Closed-end funds generally trade at a discount or premium to the value of the underlying securities. At present, most closed-end muni funds (national and single-state) trade at discounts, some as great as 13%. (Barron’s has a complete list in each weekly issue.)
Thus, you’re able to buy $1,000 worth of municipal bonds for $950, $900, even $870. Some funds from companies such as MFS, Morgan Stanley Dean Witter, Nuveen, and Putnam have solid ratings from Morningstar and offer yields up to 7%, tax-exempt. Your best choices are funds that have been around for several years, paying hefty dividends with modest price fluctuations. If you’re interested in closed-end muni funds, be aware that some sell short-term preferred shares and use the proceeds to buy more bonds. In effect, they’re using leverage to increase the yield. This may be a sound strategy-some funds have done this successfully for years-but it adds an extra layer of risk to the investment. Make sure you know how a fund attains its yield before investing.
