With bank CDs and money market funds offering skimpy yields, you might want to turn to bonds instead. The average bond fund yields 4.6 percent, according to Morningstar Inc., Chicago, while 10-year Treasuries yield just over 4 percent. However, such yields are taxable so you might wind up with around 2.5 percent, after-tax, depending on your bracket.
With municipal bond funds, by comparison, you can get a 4 percent yield, after-tax. In order to receive interest that’s exempt from state as well as federal income tax, you can invest in a single-state bond fund from your home state. Bond funds may lose value, it’s true, but bond prices are likely to be fairly stable, certainly when compared with stocks. If you’re investing in a municipal bond fund, try to find one with a low expense ratio and a history of doing fairly well when the bond market has been weak.
Individual municipal bonds may be a good alternative to municipal bond funds because funds have expenses, which can eat into your yield. In individual bonds, you might buy municipal bonds maturing in three to five years. Yields are respectable, around 3 percent, tax-exempt, and there’s a relatively small chance of a loss of principal, in case interest rates rise.
