Good time to earn some tax-free money

I have talked about Muni before, the municipal bonds that are issued by local governments to fund their local developments. Typically Muni is tax-free and a good source for those who want to earn fixed income. Muni has been around for over 100 years and has been proved to be very safe and secured as the default rate has been less than 0.1% in generally in the past 40 years. After all, governments are largely able to collect money if they need via taxes. If they are in shortage of funds to pay the bond interests, guess what, they simply increase our taxes to make it up. That’s why it is rather safe to invest in Muni if you know the appropriate way. Right now, Muni as a whole is under significant pressure primarily due to 2 reasons: it is widely expected that the interest rates are heading higher moving forward and higher interest rates are generally bad for bonds. Chicago and Peurt Rico governments  are both on the verge of bankruptcy, which certainly make Muni investors nervous. But the thing is, the market is usually overreacting and at the time of crisis when everyone runs to the hill to hide, it is the great time for those who really know what’s going on and have the gut to buy when everyone else is dumping.  I think Muni is currently in such kind of situation. Buying now will allow you to earn much higher dividends and at the same time to be potentially rewarded with good capital gains down the road. So what’s the best way to buy Muni? You may shop around to buy individual Muni issued by different governments but you will need to know the values for each. For the vast majority of investors, this is a very risky way to buy Muni. The best way is to buy closed end funds for Muni, especially when they are at large discounts. These funds invest in a large number of Muni across a wide range of territories and sectors as well as with different maturities. Even if one or two of them get in trouble and even default, the impact on the total portfolio is quite limited. The negative impact of increasing interests means nothing if the bonds can be held through their maturity. This is usually how the closed-end Muni funds will manage their portfolio. Therefore it is a great time to take advantage of the current panic selloff of Muni that has resulted in a bigger discount for the net asset value (NAV) of such funds, close to 10%. Over time, the gap of discounts will be narrowed down, which will bring you the nice capital gains. I like IIM or NIO, both of which yield about 5-6% (tax-free) with a discount to their NAV around 8-10%. Don’t miss this opportunity!