It Pays to Know the Type of Bonds Your Fund Owns

Should holders of muni mutual funds care about California’s woes?

Because the funds are diversified, you can’t lose much if a few bonds in your fund default.

Moreover, most funds take few chances: The managers often vacate iffy bonds long before trouble develops. (You’re paying for professional management, after all.)

Still, experts advise that if you’ve never looked at the types of bonds your fund owns, do so now. Note that if your fund’s yield is above-average, it probably is stocked-up with bonds whose risk is above-average too (“COPs,” in particular). If you don’t like risk, don’t own a high-yielding fund.

One option for conservative investors: Switch to an insured fund. The insurance (private, not federal) covers the bonds in the fund for risk of default.

Insured bonds pay a quarter-point or so less in interest than uninsured ones. But last year, heavy demand for insured bonds kept their prices up. Result: Some insured muni funds supplied better total returns than uninsured funds, despite paying lower yields.