Municipal bonds, often referred to as “munis,” are debt securities issued by state and local governments to finance public projects such as schools, roads, and hospitals. They are generally considered a safe investment, especially during periods of economic uncertainty. The relative safety stems from the taxing power of the issuing municipality, which ensures a steady stream of revenue to repay the debt.

One of the primary advantages of municipal bonds is their tax-exempt status. The interest income earned from municipal bonds is typically exempt from federal income taxes, and in some cases, state and local taxes as well, making them particularly attractive to high-income investors. This tax advantage can significantly increase the after-tax return on investment compared to taxable bonds.

Furthermore, municipal bonds offer diversification benefits to an investment portfolio. Because their performance is often uncorrelated with other asset classes, such as stocks, they can help reduce overall portfolio risk. Investors can purchase individual municipal bonds or invest in municipal bond funds, which offer a diversified portfolio of bonds managed by professionals.

However, it’s important to note that municipal bonds are not entirely risk-free. Credit risk, the risk that the issuer will default on its debt obligations, is a consideration. Interest rate risk, the risk that bond prices will decline when interest rates rise, also applies to municipal bonds. Investors should carefully evaluate the creditworthiness of the issuer and consider the maturity date of the bonds before investing.