Municipal Bond Forum
‘In the hole’ on bond fund
Q
In April, I invested in high-yield muni bond mutual fund and have gone in the hole on them. I don’t understand why. I haven’t made a thin dime on them. Can you advise me on when I can start getting a yield on my money?
A
James A. Klotz responds:
If by “in the hole” you mean that the market value of your fund is below your cost, this is not necessarily a cause for alarm.
Bonds and stocks have different characteristics and are purchased with distinctly different objectives in mind. Municipal bonds are purchased for income, while stock investors are seeking capital gains.
You cannot properly evaluate a bond investment without accounting for income. When you purchased your fund, you were given the option to either be paid your income on a current basis or have it reinvested automatically in the fund.
As we have stated many times, we believe investors who have the wherewithal to diversify adequately should opt for owning individual bonds, rather than the shares of a bond fund. Since individual bonds have a stated maturity date, holding them to maturity will ensure the return of your full face value.
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