My mother-in-law recently purchased an HSBC Bank muni bond fund through one of its in-house financial advisers. It's a New York fund. I was a bit surprised that the bank would recommend this because she makes only about $12,000 a year. In addition, she paid a 4% commission, which I thought was a bit high. I'm not sure what state tax rates are, but this seemed very unreasonable to me. Any thoughts? -- Mike Carroll


If indeed your mother-in-law makes only about $12,000 a year, her tax bill would be so low that she wouldn't need a tax-free investment like a muni bond fund. So it's inexplicable why anyone would have sold her such an investment, unless she insisted upon it.

Please don't take offense here, Mike. The reason I'm questioning how sure you are about your mother-in-law's income and willingness to pay taxes is because it's


a no-brainer, based on the information you've given me, that she belongs in a taxable bond fund, that I can scarcely believe an investment professional would sell her a muni fund. It's not as if HSBC doesn't sell taxable bond funds too.

Just to be sure, I checked with Gary Ambrose, a certified financial planner at

Personal Financial Management

in New York. "Given that information, this is crazy," he agreed.

For those not versed in this dynamic, here's why. Because investors don't have to pay taxes on a muni bond fund, they are willing to accept a lower yield. But investors in taxable bond fund expect a higher yield since Uncle Sam is going to take a cut.

I'll tell you how to calculate which one is right for you in a moment.

With these links to the

federal and

New York state tax rate schedules, you can see on income of $12,000 a year, your mother-in-law (I'm going to assume she's a widow and doesn't live in New York City) would owe no federal income tax, and 4% to the state.

I assume your mother-in-law bought


HSBC New York Tax Free Bond, which as of yesterday yielded 4.42%. Let's compare that to


HSBC Fixed Income, a fully taxable bond fund that invests at least 65% of its assets in bonds rated at least single-A. As of yesterday, it yielded 5.62%.

You can divide the tax-exempt yield by the taxable yield and subtract the result from 1 to calculate what's called the critical marginal tax rate. That's the rate at which it wouldn't matter, tax-wise, whether the investor picked the tax-exempt or taxable investment. If your actual marginal rate is higher, you'd prefer the tax-exempt investment. If it's lower, you'd prefer taxable. Based on the HSBC fund yields, the critical marginal rate is 21%.

Here's what you can do. Determine your mother-in-law's marginal tax rates. If they are as stated here, confirm that she didn't insist upon a tax-free investment. If her adviser sold her an unsuitable investment, the adviser should pay her the difference between what she would have earned in a taxable fund and what she earned in the muni fund, and she should switch advisers. The amount will depend on when and how much she invested, and the adviser can calculate it.

To approximate,


says HSBC Fixed Income has returned -6.05% on a load-adjusted basis since April 20, a few days before you wrote, while HSBC New York has returned -6.75%.

HSBC declined to comment specifically on your mother-in-law's situation, and a spokeswoman didn't get back to me on the more general question of which investment it would have recommended for someone in your mother-in-law's situation.

As for the commission she paid, unfortunately it isn't extraordinary. Certainly it's toward the high end, but according to Lipper, the median maximum front-end sales charge for bond funds is 3.58%.

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TSC Fixed-Income Forum aims to provide general bond information. Under no circumstances does the information in this column represent a recommendation to buy or sell bonds, funds or other securities.