Municipal bond funds are paying 4 percent yields these days, tax-exempt, the same as taxable bond funds. So why not buy muni funds and keep more money in your pocket? Here are the main risks:
Market risk. Bond yields are so low there’s probably nowhere to go but up, and rising yields mean lower bond prices.
Credit risk. The credit quality of issuers has suffered because of depleted state and local treasuries.
To protect yourself against rising interest rates, stick to funds that hold bonds with maturities that are 10 years or less, which should minimize the damage once interest rates turn up.
To guard against default, invest in funds that own general obligation bonds that are backed by the full faith and credit of a state or local government. So-called “essential purpose” revenue bonds also should be safe, especially if they are issued to finance water and sewer systems.
