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Bonds: The Unbeaten Path to Secure Investment Growth by Stan Richelson, Hildy Richelson

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Chapter 15. BONDS FUNDS A Taxing Matter

IN THIS CHAPTER, we'll look at bond funds from the point of view of their taxable status and, within that status, consider the different portfolio types. When comparing the returns on bond funds, it's very important to examine their portfolios to understand why the returns are different. As you'll see, types of bond portfolios may be presented in more than one format, which we'll point out as we describe each one. The fund types are presented in alphabetical order.

Tax-Exempt Funds

There are fewer varieties of tax-exempt funds than there are taxable funds. We describe four here. Just as you would for individual municipal bonds, compare the after-tax return on a taxable bond fund with a tax-exempt fund to determine which would give you a better return. Between October 2005 and October 2006, municipal bond funds returned 4.22 percent compared to taxable bond funds, which returned 4.16 percent, according to Morning-star.[122] Furthermore, Peter J. DeGroot, vice president and head of municipal strategies at Lehman Brothers, reported that in August 2006 the tax-adjusted returns on municipal bonds for those in the highest tax bracket were 9.63 percent during the previous ten years, compared to 6.88 percent for taxable bonds.[123] Past performance is no predictor of future returns, but if we can reduce expenses, we have a better chance of coming out ahead.

Check out the yields on the state-specific funds compared to the national funds to see if you ...

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