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Bond funds tend to be more volatile

Q

Since actual bonds are subject to market timing if you want to sell them, wouldn’t it make sense to at least partially put your muni money in good muni bond funds run by established companies like Vanguard and T. Rowe Price? Also, these funds are excellent and inexpensive vehicles for monthly reinvestment of the interest.

G.L.

A

James A. Klotz responds:

Since the bond funds own municipal bonds, they are subject to the same market conditions as the individual bonds. Actually, because bond funds have no stated maturity date, they tend to be more volatile than individual bonds, whose maturity date shortens as time passes.

Municipal bonds don’t need to be actively managed. We feel annual management fees in bond funds cause an unnecessary reduction of yield.

Feb 23, 2009

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