Picking a Muni-Bond Portfolio

Mutual funds are a good way for smaller investors to invest in tax-exempt bonds. Here are factors to consider in selecting a fund: Expenses: Management fees, administrative and selling costs, and other shareholder-borne expenses typically run between 0.6% and 0.8% each year on muni funds. Avoid funds with expense ratios near 1% or more. Loads: Fund companies can’t justify big sales charges on investments that are paying only 5.3% on average (according to the Securities and Exchange Commission’s standardized yield calculation). Certainly, sales charges of 5% or more on muni portfolios would be excessive. Performance: Obviously, you want a fund that has done better than its peers over at least a three- to five-year period. If possible, find out how the fund fared during the second and third quarters of 1987, when the average muni-bond portfolios lost nearly 7%, including interest. Geographic focus: Muni-bond funds either hold a national portfolio of bonds or concentrate in a single state. The latter aren’t so well-diversified, but they do pay double tax-free interest (exempt at both the federal and state levels). Californians now can choose from 78 in-state funds paying an SEC-average yield of 5.4%, according to Lipper Analytical Services.