Smart Investment Options: Tax-Exempt Income Funds to Boost Your Returns
Explore tax-exempt income funds as a strategic investment to boost your income while reducing tax liabilities. Learn how municipal bond funds can benefit investors, especially those in higher tax brackets, through comparative performance analysis and investment strategies.
Paying taxes can be a complex task; however, it’s an essential part of benefiting from living in a developed country. Fortunately, there are legal strategies to reduce your tax liability. Investors can explore tax-exempt income funds to grow their earnings while minimizing tax payments.
To understand tax-exempt income funds better, it helps to break down the concept. An income fund is typically a mutual fund or ETF that distributes dividends to investors.
This investment vehicle allows investors to generate a steady income stream through dividends that are exempt from taxation. Such funds are often municipal bond funds. If you are in a higher tax bracket, choosing a tax-free municipal bond fund from your state can be a financially savvy decision.
Before investing, it’s crucial to evaluate the potential benefits of tax-free income funds. Comparing the after-tax return of taxable versus tax-exempt funds based on your marginal tax rate can help identify the more profitable option. For instance, recent performance data shows that the American High-Income Municipal Bond Fund returned 4.33% with a 0.68% expense ratio, MFS Municipal High Income Fund achieved 5.18% with a 0.69% expense ratio, Columbia High Yield Municipal Fund delivered 5.20% with a 0.87% expense ratio, and the Principal California Municipal Fund posted a 3.93% return with a 0.77% expense ratio.
