- 1). Locate several municipal bond funds you want to compare. There are many funds available, so ask financial advisers, tax advisers and other investors for recommendations. You can do further online research at reputable sites such as Morning Star, MSN Money and Yahoo Finance.
- 2). Contact the mutual fund provider either by phone or through a financial adviser to obtain a prospectus. This will give you the important details to understand the differences between different funds.
- 3). Read the objective of the fund. There are different types of tax-free funds, including national funds, state-specific funds, insured funds and high-yield funds. If you live in Minnesota and are buying a California tax-free state-specific fund, you will not earn tax-free interest on the fund.
- 4). Choose two or three funds from your list that have the same objective and fit your needs. So if you are in Minnesota, find three Minnesota state-specific or national tax-free funds to review.
- 5). Review the funds' fees. These include "loads," which are fees paid upon buying or selling specific share classes as well as annual management fees. The lower the fees the more money is translated into earnings for you.
- 6). Look for the turnover ratio in the mutual fund prospectus or a third-party research site such as Morning Star or Yahoo Finance. The turnover ratio refers to the percentage of the portfolio assets sold prior to maturity for a gain or loss. Gains and losses are not exempt, so the higher the turnover ratio the higher your possible tax consequence is.
- 7). Evaluate risk. Most municipal bonds are considered a low-risk investment. Third-party rating companies grade bonds. Always seek a fund that buys "investment grade" bonds with grade of BBB, A, AA or AAA.
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