Muni Bond Funds That Work for You

This article originally appeared in Dagen's newsletter, The Save Safe Plan, which also includes a model portfolio of promising dividend-bearing stocks. For more information on this product, please click here.

Investing in tax-exempt municipal bonds is a great idea. But buying them one by one is not.

Individual bonds are issued by airports, water authorities and other community organizations across the country, making it tough to assemble a truly diversified portfolio on your own. And if you ever want to sell your muni bonds, there's not a big market for them. You will pay dearly to dump them.

An easier option is to buy a tax-exempt bond fund. And there are plenty of them out there.

If you live in a high-tax state, a fund that's specific to your state is a better choice. A national tax-exempt fund won't give a break on your state taxes, but its income will still be free from federal taxes. And despite the president's recent tax cut on capital gains and dividends, bond interest is still taxed at higher income tax rates. Except for muni-bond income, that is.

Watch the Fees

Because the upside in muni bonds is more limited than what you might get from stocks, you should keep the fees to a minimum. Costs are crucial. You can start your hunt by checking out the offerings from the major no-load mutual fund companies. Fidelity, Vanguard and T. Rowe Price all offer solid choices. Here are a few ideas.

Vanguard should always be one of your first stops if you're trying to keep costs down. The firm's funds are cheap. Period. And that certainly includes the firm's tax-exempt funds.

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