Are munis a good deal?

The Answer Guy tells you how to find out. Plus: Are you good at picking funds?

By George Mannes, Money Magazine senior writer

(Money Magazine) -- Question: How can I know if my broker is offering me a good deal on individual municipal bonds? And are munis a good investment? - Felice Bedford, Tucson

Answer: Depends how you define a good deal. In theory munis can be great: If you're in a high tax bracket, you may get better after-tax returns from munis, since their interest is free from federal taxes and often from state and local levies. (Do the math.)

But even the best deal for the little guy may not be so hot. Unlike the case with stocks, a broker's profit on munis comes from a spread - the gap between the price he buys it for and the marked-up one he sells it for. Because smaller purchases tend to have higher markups (and thus lower yields), if you have less than a hundred thousand or so to invest, you're better off in no-load, low-expense muni funds or buying new munis at the offering price and holding them until maturity.

If you still want to buy from a broker, check how good your deal is by seeing what other folks are paying.

Happily, you have a great resource that nonprofessionals didn't have in years past: the site Investinginbonds.com, which lists all recent sales, along with information such as the bond's yield. For pricing on whatever your broker is selling (or buying from you), click on Municipal Market at-a-Glance, then plug in the CUSIP - an alphanumeric ID - of the bond.

If the yield you're quoted doesn't look fair compared with what other customers are getting for similar-size transactions, your broker has some explaining to do.

Question: What are the chances that I can pick mutual funds as well as a financial adviser can? - Jos Avils Sr., Cleveland

Answer: Without studying your investment records in detail, Answer Guy will go out on a limb: You're just as good as plenty of pros at selecting mutual funds.

What's the evidence of your fund-picking abilities? It's an intriguing 2006 paper written by a trio of business-school professors, titled "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry."

Among their conclusions, based on comparisons of broker-sold funds vs. ones investors purchase directly: The brokers' choices are more expensive. And they have lower returns too. (The study doesn't address the abilities of planners whose fees aren't linked to specific investments, just those of commission-earning brokers.)

What a good financial adviser can - and should - do for you is match your investments to your needs and tolerance for risk, as well as protect you from impulsive investing decisions.

But, says study coauthor John Chalmers, if you expect your broker to tell you which mutual funds are going to be top performers, "there's a good chance you're going to be disappointed."  Top of page

Money 70: Best funds you can buy now

Looking for some answers? Send us your questions about investing. E-mail answer_guy@moneymail.com.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.