In our experience, investors have many reasons for amassing a large cash position but generally one reason to wonder about diversifying their cash position: They are seeking a higher total return than the all-cash position can provide.
These investors may wish to hold onto a portion of their cash positions but may wish to consider a strategy of investing a portion of their cash assets into short- or limited-term municipal securities. These types of strategies have the potential to improve the net total return of a portfolio because the income generated by muni securities is exempt from federal income taxes and, in some instances, from state and local income taxes, too. Our infographic shows two of the various strategies for diversifying with muni investments.
Munis and cash (or cash alternatives) don’t have identical risk profiles, of course, but investors with a preference for cash may be pleasantly surprised to discover that short- and limited-term muni bonds have historically exhibited far less price volatility and duration risk than longer-term munis.
Of the 13 Oppenheimer Rochester municipal bond funds, 5 have specific average effective maturity (AEM) targets:
- Oppenheimer Rochester Short Term Municipal Fund (AEM of 2 years or less)
- Oppenheimer Rochester Intermediate Term Municipal Fund (AEM of 3 to 7 years)
- Oppenheimer Rochester Limited Term California Municipal Fund (AEM of 5 years or less)
- Oppenheimer Rochester Limited Term New York Municipal Fund (AEM of 5 years or less)
- Oppenheimer Rochester Short Duration High Yield Municipal Fund (AEM of 5 years or less)
Investors, we believe, will appreciate what these funds have in common. All can provide a compelling tax-free income stream and diversification benefits. These funds have historically offered higher yields than individual municipal bonds and highly competitive yields versus peer funds. Like all of our funds, these 5 are consistently reviewed by our risk management professionals and managed based on an investment approach we call the Rochester Way.
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Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates, or an expectation of rising interest rates in the near future, will cause the value of a fund’s investments to decline. Risks associated with rising interest rates are heightened given that rates in the U.S. are at, or near, historic lows. When interest rates rise, bond prices fall and a fund’s share price can fall. Municipal bonds are subject to default on income and principal payments. Further, a portion of some funds’ distributions may be taxable and may increase alternative minimum tax (AMT) for investors subject to that tax; distributions from net realized capital gains are taxable as capital gains.
The funds invest in below-investment-grade debt securities, which may entail greater credit risks, as described in each fund’s prospectus. These securities (sometimes called “junk bonds”) may be subject to greater price fluctuations and risks of loss of income and principal than investment-grade municipal securities. The funds may invest substantially in municipal securities within a single state or related to similar type projects, which can increase volatility and exposure to regional issues. The funds may also invest substantially in Puerto Rico and other U.S. territories, commonwealths and possessions, and could be exposed to their local political and economic conditions.