Investing in mutual funds is a powerful yet simple way for investors to achieve long-term financial goals with less risk than picking individual stocks. Mutual funds also offer a steady stream of income.
But today's best strategy for investing in mutual funds focuses on stability and yield, not just income.
And that's all because of the U.S. Federal Reserve.
No one can tell what the Fed's next move is going to be regarding interest rates. A strengthening dollar and deflationary pressures on the U.S. economy seem to support the U.S. Federal Reserve's protracted low-rate policy. But at the same time, labor market indicators are clearing up. About 295,000 jobs were added in February and the unemployment rate sits at 5.5%. That adds fodder to the Fed hawks' calls to raise rates.
This uncertainty will fuel interest rate volatility in the near future. But a solid mutual fund investing strategy will preserve capital and protect against these potential wild rate swings.
"Many investors challenge me on the notion of stability when I am speaking at conferences every year, especially as it relates to income. They'd rather chase yield," Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "Yet, stability means you never have to worry about making up money you don't lose in the first place."
Investors won't get that stability by going after the high-yield, longer-term bonds. At least not in today's investing environment.
That's why the best place for the mutual fund investing crowd to put their money to work right now is on the lower-end of the yield curve…
Investing in Mutual Funds for "No Drama"
U.S. Global Investors Near-Term Tax-Free Fund (MUTF: NEARX) is a five-star municipal bond fund with a solid track record. It's generated positive returns for its clients every year for the last two decades.
Only 0.12% of funds can lay claim to such a feat, according to U.S. Global Investors.
That's why Fitz-Gerald told investors about it in November.
"It's my favorite 'no-drama' – or to be more precise, 'anti-drama' – investment, and has been for some time," Fitz-Gerald said.
Of NEARX's $89.5 million in assets, about 90% is invested in U.S. municipal bonds.
"Munis, generally speaking, are just an overlooked asset class," John Derrick, Director of Research at U.S. Global Investors Inc. (Nasdaq: GROW) and a fund manager for NEARX, told Money Morning. "It's a little messier market but over time they perform phenomenally."
Munis fly under the radar for many investors because the market is fragmented. It's also not as standardized when compared to other asset markets.
But munis are attractive because the interest rate returns are exempt from federal income tax. This offers great tax-adjusted returns against comparable yielding investments that don't have that luxury.
Muni bears will point to the high-profile 2013 bankruptcy of Detroit as a case against these bonds. But data shows that Detroit is an extreme exception to the rule. Moody's Investor Services rated 8,800 municipal bonds between 1970 and 2013. Of those, only 80 – or 0.9% – defaulted.
The other 10% of NEARX's assets is in cash. This cash is replenished by constant maturity payments of short-term securities, providing a lot of liquidity to the fund.
21.2% of NEARX's holdings mature in less than a year. The average maturity of the fund's holdings is 2.44 years. And when NEARX's managers see unusual patterns in bond market volatility, that's when they'll sell to up their cash hoard, or buy to find bonds on the cheap.
NEARX is one of several municipal bond funds that take advantage of the favorable tax treatment and stability of the asset class.