Investors seek out governm🐠ent bonds because they tend to be low-risk and stable investments.

The primary difference between municipal bonds, also known as "munis," and 澳洲幸运5官方开奖结果体彩网:money market funds is that municipal bonds are single bond issues from local or state governments, while money market funds are a type of 澳洲幸运5官方开奖结果体彩网:mutual fund that invests in short-term, low-risk debt. A money market fund might invest in municipal bonds, 澳洲幸运5官方开奖结果体彩网:commercial paper, 澳洲幸运5官方开奖结果体彩网:repossession agreements, 澳洲幸运5官方开奖结果体彩网:certificates of deposit, or 澳洲幸运5官方开奖结果体彩网:Treasurys issued by the federal government.

Municipal Bonds

Municipal bonds refer to debt that is issued by state or local governments to finance 澳洲幸运5官方开奖结果体彩网:capital expenditures. When you buy a municipal bond, you are loaning money to the municipality, which agrees to pay you back with interest. These governments use the money raised by muni bond issues to fund projects which are then repaid to creditors through revenue ge💯nerated by that project (e.g. a toll road), or else by taxing its citizens.

Income from these bonds is usually tax-exempt at the federal, state, and local levels, making it attractive to investors seeking to lower their taxable income. As a result, they tend to have lower yields than a taxable equivalent bond. Munis also ma൩y have lower yields because these bonds are issued by government entities that can tax their citizens.

These governments, however, cannot print money or issue Treasurys, and are therefore more risky than bonds issued by the federal government. Indeed, municipalities and even states have def♏aul𝔉ted on their municipal bond issues in the past.

Money Market Funds

🥃Money market funds are fixed-income mutual funds that invest in high-quality debt securities, usually with very short maturities and low credit risk. Money market mutual funds are among the lowest-volatility types of investments. Income generated by a money market fund is either taxable or tax-exempt, depending on the types of securities the fund invests in. 

There are some money market funds that are primarily invested in municipal bonds, thus creating municipal money market funds. These funds bring together the tax benefits of municipal bonds with the stability, liquidity, and diversification qualities of money market funds. All of these benefits tend to attract high-income investors seeking a 澳洲幸运5官方开奖结果体彩网:tax shelter. 

Their Risks

Municipal Bonds

One of the major risks associated with municipal bonds is the possibility that short-term yields will rise. This means other bonds coming on the market will pay a higher rate to bond owners, and your bond will be seen a꧋s less valuable. This can cause the price of your bond to drop. This is only a 🍌problem if you decide to sell the bond. You will still receive your interest payments.

Another risk is that municipal bond returns may not keep pace with 澳洲幸运5官方开奖结果体彩网:inflation. If inflation rises, your bond yield will stay the same. Eventually, you may be making le🍨ss in interest than the inflation rate. If inflation is at 5% and you are earning 3%, you are losing money. Your interest income won't have as much buying power. Though extremely rare, default is also a risk to investors in municipal bonds.

Money Market Funds

This is one of the safest investments you can find. These funds very rarely lose value, and the interest they pay is reliable. Because of this safety, they also pay very low interest. 澳洲幸运5官方开奖结果体彩网:Risk and reward are always relate✨d: Lower risk means lower rewa𓆉rd. 

Frequently Asked Questions

The Bottom Line

If you are investing for income, either municipal bonds or money market funds will pay you interest. Just know that bonds can lose value and money market funds most likely won't. Note also that since municipal bonds are income-tax free, you are actually making more than the interest rate would indicate. You can factor in your tax savings as part of the value of buying such a bond.

Correction—April 16, 2023. This artiꦬcle has been edited to clarify that money maꦅrket funds can invest in a variety of debt securities, not just Treasurys.