Funds help put money to local use

Financial advisers generally have several criteria they look at when choosing the best mutual fund for a client’s investment portfolio.
They could choose based on how well-managed it is, how inexpensive it is, whether it’s tax-free or Rhode Island specific in its investment.
But most investors aren’t asking specifically for a tax-free mutual fund that invests exclusively in Rhode Island municipal bonds.
The question is: Should they be?
Stephen Caridi, senior vice president of Aquila Group of Funds, which administers the Narragansett Insured Tax-Free Income Fund, thinks so, because the fund only invests in AAA insured Rhode Island bonds for projects such as new intermodal transportation facility being built at T. F. Green Airport in Warwick. And it has purchased bonds for projects such as the R.I. Convention Center and the University of Rhode Island’s Ryan Center.
“It’s something we’ve always promoted,” he said. “We’re helping Rhode Island build schools and highways, as opposed to building them in Tennessee or in Chicago.”
Because the fund invests in municipal projects, the return is tax-free at both the state and federal level, which appeals to investors in the higher income-tax brackets, especially in the 55-60 age bracket, Caridi said.
Some people in lower tax brackets will ask for tax-free mutual funds as well, because they just hate paying taxes, said Oliver Tutt, managing director at Providence-based Randall Financial Group LLC.
But although Rhode Island taxes aren’t low, Tutt said, he wouldn’t necessarily suggest one of the four Rhode Island focused tax-free mutual funds to clients based on that one criterion.
“I’d rather have the big menu,” he said. “If you have a broad array you’re screening through, you’re more apt to find one that meets all of your criteria. … Avoidance of Rhode Island tax would be a benefit.”
Another benefit of investing in municipal bond mutual funds is that it’s much easier, from an administrative standpoint, than investing in individual municipal bonds, said Robin Lovely, principal of Providence-based Lovely and Co. The downside is that mutual funds sometimes trade bonds before they reach maturity, and that could cause investors to lose money on the principal.
As it stands, Rhode Island tax-free mutual funds have a one-year rate of return of .32 percent to 2.06 percent on average, with NITFIF’s being the highest.
That’s roughly in line with the average one-year returns on municipal stock funds nationwide, according to the latest data from Morningstar Inc., but only a fraction of the typical returns for taxable stock funds; the average return for mid-cap stock funds has been 8.93 percent, according to Morningstar, and mutual funds focused on utilities as well as technology returned more than 27 percent.
If investors were buying the bonds directly, they could get all of their money back on the principal once the bond matures, Lovely said. It’s much less likely for individual investors to invest directly in municipal bonds in Rhode Island, however, because the state is so small. There generally aren’t enough projects to build a portfolio.
The fact that there are so few bonds gives the mutual funds an edge, Lovely added, because if an investor wants to invest specifically in Rhode Island projects, they almost have to invest in a fund instead of a specific bond.
The tax-free municipal bond mutual funds are also handy when dealing with irrevocable trusts, Tutt said, because the trusts tend to be subject to high tax rates. An irrevocable trust can earn less than $10,000 in trust income and still be subject to the highest tax rate.
“It becomes more important for trusts to have as little trust income as possible,” he said. “One way to do that is to utilize municipal bond funds.” •

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