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Bonds: Check 'em Out

By Dian Vujovich

Yippee! People are investing. And investing in everything from equity funds, to money market and bond funds.

Here’s some good news: Lipper Inc. reported that in January all three major asset classes enjoyed positive net inflows: Money market funds picked up $68.3 billion; bond funds $14.3 billion; and equity funds $11.7 billion.

More good news: It’s the first time since May ’08 that that has happened in all three asset classes.

It’s great to read about people using their money and spending some of it on investments. It is, after all, we– the people—who will turn this economy around. But more on that another day.
Today it’s time to talk bonds. Fixed-income and municipal ones.
Lest you think that they are crappy investments, think again. On average, of the 1,538 bond funds that Lipper tracks under the heading of General Domestic Taxable Fixed-Income Funds, the average year-to-date return, (through Feb.12), was 2.53 percent. Of that group, the type with the greatest return was the Loan Participation Funds. They were up on average 8.3 percent. Second best? High Yield funds, up on average 5.51 percent over that same time period.

The worst performing category was General US Treasury Funds, They’re off 4.92 percent. Behind it, US Government Funds off 0.99 percent.

As you can see, the names of the top-performing categories carry the most risk. Risk has gotten an ugly name lately but the fact is, that little four-letter word is an integral part of every single investment you make be it a stock or bond investment. There’s no getting around that.

For weekly bond and equity fund performance overviews, you’ll find Lipper’s Investment Objective Performance Summary at my mutual fund educational site, http://www.allaboutfunds.com. Updates typically appear each Friday.

And then there are municipal bonds. I love munis. Maybe that’s because the first job I ever had in the brokerage business was selling tax-free municipal bonds for J.B.Hanauer. That was decades ago when municipal bonds still had coupons on them that needed to be clipped and were returning tax-free yields in the range of 10 percent and more. At that time investors preferred owning muni bonds outright, or unit investment trusts comprised of them, to buying tax-free bond funds.

The appeal for tax-free municipal bonds still exists today. A recent T. Rowe Price Report pointed out that the equivalent taxable yield for someone in the 35 percent tax bracket investing in a 30-year AAA-rated municipal bond with a yield of 5.8 percent would be 8.9 percent.

Yes, we’ve all aware that some states and municipalities are in deep financial trouble, but the keys to investing in tax-free muni bonds are first, making sure that you’re in a high enough tax-bracket to benefit from their returns. Second, you understand the investment and realize that to minimize risk investigate those of the very highest quality. That would be insured and triple-A rated.

And finally, that you understand even the highest quality of anything isn’t risk-free. Nor are investments of lesser quality always bum deals.

Read the rest of the story at
http://www.nytimes.com/interactive/2009/02/20/business/0222-pay-graphic.html?ref=business and weep.

To read more articles, please visit the column archive.

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