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4 Tax-Exempt Funds to Buy During the 2019 Tax-Filing Season
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With trade tensions far from being resolved, market volatility is likely to remain high in 2019. Investors with a lower appetite for risk will naturally seek out investments, which are relatively safe and provide marginally higher returns. This is where tax exempted funds come in.
The best way to generate a tax-free return is to invest in instruments that are not taxable. The best examples of such funds are municipal bonds and certain other government securities whose returns are often free of tax at state and federal levels.
Benefits of Investing in Tax-Exempt Securities
Investing in tax-exempt mutual funds not only prevents your current income from being taxed but is also risk-free since these funds encompass government-issued bonds. Although these offer lower rates of return than high-risk funds that comprise more volatile securities, the stability offered by these funds along with tax-free returns make tax-exempt municipal bonds extremely attractive investment options.
Another investment instrument that is a lucrative option is the non-AMT exempt municipal bond. While municipal securities pay interest that is exempted from federal tax, some of these may still be subjected to the alternative minimum tax (AMT). AMT-applicable bonds have higher yields against non-AMT ones, increasing the risk of current income becoming taxable. Therefore, investing in an actively managed AMT-free municipal bond portfolio could help dodge tax on current income.
Why Invest in Government Bonds?
Apart from tax benefits, government bonds are safe investments as they are backed by the government of the Unites States. This offers a high level of security to investment as compared to stocks or corporate bonds, which are subjected to risks associated with the performance of the company.
The liquidity of government bonds makes these instruments flexible, which means that these can be bought and sold as and when deemed necessary. However, depending on market conditions, an investor may make profit or loss out of unloading the bond.
In addition, the fixed rate of government bonds will give you steady returns, irrespective of market movement. In case financial markets are not doing well, an investor will receive a higher rate on the investments than what the market could pay.
4 Tax-Free Funds to Save Maximum
We have selected mutual funds that invest in government and municipal bonds. These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5,000.
We expect these funds to outperform peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Schwab CA Tax-Free Bond (SWCAX - Free Report) aims for high current income that’s exempted from federal as well as California personal income tax, which is on par with capital preservation. The fund invests the majority of its assets in investment-grade municipal securities, typically in the four highest credit rating categoriesfrom California issuers. The fund’s investment in municipal securities has its interest exempted from federal and California personal income tax and federal alternative minimum tax.
This Sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
SWCAXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.49%, which is below the category average of 0.75%. The fund has three and five-year returns of 1.5% and 2.8%, respectively.
Vanguard CA Interm-Term Tax-Exempt Inv (VCAIX - Free Report) seeks to offer a higher current income than shorter-term bonds but with less share-price volatility than longer-term bonds. The fund mostly invests in high-quality municipal bonds issued by the California state, local governments as well as regional governmental public financing authorities. The majority of the fund’s assets are invested in securities whose interest is exempted from federal and California state taxes.
This Sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
VCAIXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.17%, which is below the category average of 0.75%. The fund has three and five-year returns of 1.8% and 3.1%, respectively.
Vanguard MA Tax-Exempt Inv (VMATX - Free Report) seeks to generate a high current income that is exempted from federal as well as Massachusetts personal income taxes. VMATX primarily invests in high-quality municipal bonds issued by Massachusetts state and local governments as well as regional governmental public financing authorities. This non-diversified fund’s 80% of assets are invested in securities whose income is exempted from federal and Massachusetts state taxes.
This Sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
VMATXhas a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.13%, which is below the category average of 0.82%. The fund has three and five-year returns of 1.9% and 3.7%, respectively.
T. Rowe Price California Tax-Free Bond (PRXCX - Free Report) seeks to offer high income that is exempted from federal as well as California state income taxes. The fund invests up to 80% of its net assets in bonds that generate interest exempted from federal and California state income taxes. Therefore, up to 80% of the fund’s income is exempted from the respective taxes.
This Sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
PRXCXhas a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.53%, which is below the category average of 0.86%. The fund has three and five-year returns of 1.9% and 3.9%, respectively.
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4 Tax-Exempt Funds to Buy During the 2019 Tax-Filing Season
With trade tensions far from being resolved, market volatility is likely to remain high in 2019. Investors with a lower appetite for risk will naturally seek out investments, which are relatively safe and provide marginally higher returns. This is where tax exempted funds come in.
The best way to generate a tax-free return is to invest in instruments that are not taxable. The best examples of such funds are municipal bonds and certain other government securities whose returns are often free of tax at state and federal levels.
Benefits of Investing in Tax-Exempt Securities
Investing in tax-exempt mutual funds not only prevents your current income from being taxed but is also risk-free since these funds encompass government-issued bonds. Although these offer lower rates of return than high-risk funds that comprise more volatile securities, the stability offered by these funds along with tax-free returns make tax-exempt municipal bonds extremely attractive investment options.
Another investment instrument that is a lucrative option is the non-AMT exempt municipal bond. While municipal securities pay interest that is exempted from federal tax, some of these may still be subjected to the alternative minimum tax (AMT). AMT-applicable bonds have higher yields against non-AMT ones, increasing the risk of current income becoming taxable. Therefore, investing in an actively managed AMT-free municipal bond portfolio could help dodge tax on current income.
Why Invest in Government Bonds?
Apart from tax benefits, government bonds are safe investments as they are backed by the government of the Unites States. This offers a high level of security to investment as compared to stocks or corporate bonds, which are subjected to risks associated with the performance of the company.
The liquidity of government bonds makes these instruments flexible, which means that these can be bought and sold as and when deemed necessary. However, depending on market conditions, an investor may make profit or loss out of unloading the bond.
In addition, the fixed rate of government bonds will give you steady returns, irrespective of market movement. In case financial markets are not doing well, an investor will receive a higher rate on the investments than what the market could pay.
4 Tax-Free Funds to Save Maximum
We have selected mutual funds that invest in government and municipal bonds. These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5,000.
We expect these funds to outperform peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Schwab CA Tax-Free Bond (SWCAX - Free Report) aims for high current income that’s exempted from federal as well as California personal income tax, which is on par with capital preservation. The fund invests the majority of its assets in investment-grade municipal securities, typically in the four highest credit rating categoriesfrom California issuers. The fund’s investment in municipal securities has its interest exempted from federal and California personal income tax and federal alternative minimum tax.
This Sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
SWCAXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.49%, which is below the category average of 0.75%. The fund has three and five-year returns of 1.5% and 2.8%, respectively.
Vanguard CA Interm-Term Tax-Exempt Inv (VCAIX - Free Report) seeks to offer a higher current income than shorter-term bonds but with less share-price volatility than longer-term bonds. The fund mostly invests in high-quality municipal bonds issued by the California state, local governments as well as regional governmental public financing authorities. The majority of the fund’s assets are invested in securities whose interest is exempted from federal and California state taxes.
This Sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
VCAIXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.17%, which is below the category average of 0.75%. The fund has three and five-year returns of 1.8% and 3.1%, respectively.
Vanguard MA Tax-Exempt Inv (VMATX - Free Report) seeks to generate a high current income that is exempted from federal as well as Massachusetts personal income taxes. VMATX primarily invests in high-quality municipal bonds issued by Massachusetts state and local governments as well as regional governmental public financing authorities. This non-diversified fund’s 80% of assets are invested in securities whose income is exempted from federal and Massachusetts state taxes.
This Sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
VMATXhas a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.13%, which is below the category average of 0.82%. The fund has three and five-year returns of 1.9% and 3.7%, respectively.
T. Rowe Price California Tax-Free Bond (PRXCX - Free Report) seeks to offer high income that is exempted from federal as well as California state income taxes. The fund invests up to 80% of its net assets in bonds that generate interest exempted from federal and California state income taxes. Therefore, up to 80% of the fund’s income is exempted from the respective taxes.
This Sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
PRXCXhas a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.53%, which is below the category average of 0.86%. The fund has three and five-year returns of 1.9% and 3.9%, respectively.
Want key mutual fund info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>