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I was lately been looking into some investment strategies, and I thought that short-term, all-single state municipal bond funds (which are free from both state and federal taxes), might be a good way to park money for non-investors that want to beat the ridiculously low bank rates, want stability and don't care to read into mutual funds / spend time to plan investing etc.

And to give you an example: I live in MD, and I can use for that purpose the T. Rowe Price MD Short-Term Tax-Free Bond Fund (other companies like Vanguard, Fidelity etc. offer similar funds for other states). From the Google finance data for this fund (http://www.google.com/finance?q=MUTF:PRMDX), I can see that:

  • The fund's NAV has stayed between $5 and $5.30 for over 10 years. So no much worries for capital fluctuations there.

  • It gives 1.5% per year, which is completely tax-free. Total beats savings and CDs, especially if you take complete tax exemption into account.

I saw similar number for all other states' muni, short-term funds that I looked into.

So what do you guys think ? Is this a way for people to boost their local economy and help their wallet also (I'm big into the eat local, live local thing). Is this a way to hack the big banks which take our money and give it as bonuses to their execs instead of busting their rears to invest on our behalf and give us more than 0.5% (since they have our money in their hands the bankers should get to work!)

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Banks' savings interest is ridiculous, has always been, compared to other investment options. But there's a reason for that: its safe. You will get your money back, and the interest on it, as long as you're within the FDIC insurance limits.

If you want to get more returns - you've got to take more risks. For example, that a locality you're borrowing money to will default. Has happened before, a whole county defaulted.

But if you understand the risks - your calculations are correct.

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If your main goal is to avoid taxes, municipal bonds are a good strategy, it's not the best way to make more than 1-2% in gains.

And kudos for putting money back into the community.

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