Stock Market

When the stock market experiences a downturn, investors begin to sell off shares and this causes stock prices to fall even further. Investors can either take the cash or move their money from mutual funds containing primarily stocks to conservative mutual funds such as bond funds. People who move money between funds operated by the same investment company do not usually have to pay commissions. Bonds are much less volatile than stocks, which means mutual funds holding bonds are not as impacted as stock funds during market downturns. Therefore, many people use bond funds as safe harbor investments meaning that stock market downturns are a good time to buy bond funds.

Taxes

The federal government does not assess ordinary income tax on interest earned on most types of municipal bonds. States do not assess income tax on interest earnings on in-state bonds. Generally, municipal bonds pay lower rates of interest than taxable bonds because of the tax savings. However, when taxes rise, municipal bonds become more attractive, and increasing numbers of investors buy municipal bond mutual funds, which causes the price of each share to rise. Therefore, many savvy investors buy large numbers of shares in municipal bonds just prior to tax increases taking effect.

Other Considerations

References

Resources

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