California muni bonds raise capital for the state to support the development of major infrastructure projects including schools, roads, bridges and housing. By purchasing a CA municipal bond, you are purchasing debt from the state government to provide financing. Typically, these types of muni bonds mature after 5-6 years and pay tax-exempt interest. As an investor, you might be considering buying California muni bonds. At the same time, you are likely looking for the best bond rates available. Keep in mind that these muni bonds are not for everyone. In this post, we’ll cover whether California muni bonds are a good investment or not.
Better For High Income Individuals
Since California municipal bonds are tax free, high net worth individuals have the most to gain. If you fall into the top tax brackets, this investment could have a greater impact on tax obligation. For lower income individuals, you could receive a higher rate with taxable bonds. Of course, you should consult with your accountant about your current tax bracket and how investing in CA muni bonds could help or hurt your situation. Overall, avoiding taxes on earned interest is highly attractive to keep your tax payments low.
Your Investment Is Protected
When it comes to servicing debt, municipalities like the state of California pay back their bonds in high priority. Especially in CA, the debt is paid second after schools. As an investment, this is great protection if you are a citizen of the state. Investors constantly seek investment opportunities that offer protection. They buy gold bullion and look at the top muni bonds. This muni bond offers protection for having your principle and interest paid back. This is a contributing factor as to why many Californians own state muni bonds. If you live in the state, these bonds could be a good investment for the local and financial protection.
Low Expectation For Default
Unless the state of California defaults, the state’s municipal bond would be a good investment. Since 2009, the economic conditions of California’s budget has improved. While there are deficits in other fiscal years, the chances of having a default or bankruptcy are very low. However, it has happened in cities such as Detrioit and Jefferson City. With the current budget expected to have no issue, buying a California muni bond could be a good investment.
Long Term Yields Over 4%
When investing in California municipal bonds, you can expect to earn yields between 3.69% to 5.49%. Since smart investors always search for high yield bonds, California muni bonds are worth looking into. Depending on your investment goals, a long term investment strategy could yield nearly 4.5%. This return is tax free so you would have to make an adjustment to compare to other long term investment yields. Compare bond yields based on the interest earned before and after taxes. While this isn’t this highest yield available, it may work to mitigate your risks and taxes while earning some interest.
Diversify Your California Muni Bonds
Additionally, Cali muni bonds can be a great investment with ETFs. These portfolios diversify their assets into various CA muni bonds. These types of ETFs lower the exposure of one of the bonds defaulting. Therefore, California municipal bond ETFs would be a good fit for investors who are looking for a diversified portfolio within the state’s bond options. However, these ETFs are still susceptible to losses overall compared to investing in just one CA municipal bond. Depending on your appetite for risk, you could make California muni bond ETFs a good investment for you.
The available California municipal bonds are a good investment if you have the following needs. Firstly, high net worth investors can limit tax liabilities. The investment is protected since the state of CA pays their debt second. Recently, the state of CA has a good overall outlook for the budget, lower it’s risk of default. With yields above 4% and ETF options, the California muni bonds could be a very good investment decision in the long run.