Now that everyone has paid his or her taxes (or at least filed for an extension), it is as good a time as any for investors to check the tax efficiency of their investment portfolios. If a portfolio is throwing off large amounts of taxable income, swapping out of a government- or corporate-bond fund and into a municipal-bond fund could go a long way toward trimming next year's tax bill.
In years past, muni funds were commonly reserved for investors in the highest tax brackets, but nowadays their gross yields are not far off those of comparable Treasury bonds. For example, a 10-year municipal bond rated AAA recently checked in with a yield of 5.1 percent, while the 10-year Treasury note yielded 5.8 percent.
. We've selected a few funds that are strong performers and that are available at no additional cost.
Scudder Managed Municipal Bonds. This fund has consistently ranked among the top-performing long-term municipal funds. The fund mainly invests in longer-term investment-grade bonds. Owning long-term munis makes it a bit more sensitive to interest-rate changes than most, but its performance has more than made up for its added volatility.
American Century Intermediate Tax Free. This fund may not offer flashy returns, but it scores high marks for its low volatility and low expenses. Like the Scudder offering, it concentrates on high-quality investment-grade bonds. This fund tends to be less sensitive to interest-rate changes.
Strong Short-Term Muni Bond. This is one of the best-performing short-term muni funds. It takes on more credit risk than most, but a healthy economy and demand for its higher-yielding bonds has kept the fund's returns near the top of the short-term muni heap for the last five years. However, the fund's added credit risk makes it more susceptible to an economic slowdown.