• Compare the returns from municipal bonds to other types of bonds. Since the interest is generally exempt from federal, and sometimes state and local, income taxes, your marginal tax bracket is a significant factor in deciding whether municipal bonds are appropriate for your situation. (Any capital gains are subject to taxes. Interest income for some investors may be subject to the alternative minimum tax.) Make sure to determine how a muni bond’s yield compares to the after-tax yield on a comparable taxable bond. To do that, calculate the tax-equivalent yield for the municipal bond.

• Don’t simply select the bond maturity that offers the highest return. Since interest rate changes can significantly affect your bond’s market value, it may make more sense to select a maturity that coincides with when you need the principal. If you are investing with a long time horizon, evaluate the yield curve for municipal bonds before deciding on a maturity date. You may find that increasing the maturity of your bond by a couple of years will increase your return or that committing your funds for a long time does not bring much additional return in exchange.

• Look at the bond’s call provisions. Most municipal bonds come with a call provision, which allows the issuer to redeem the bonds prior to their scheduled maturity. Calls are generally only exercised when market interest rates are lower than the interest rate being paid on the bond and are generally not good news for the bondholder. While most municipal bonds have call provisions, the exact provisions can differ significantly among bonds.

• Review the bond’s credit quality. While municipal bond defaults are rare, they do occur, so review carefully the credit quality of muni bonds. You may want to stick with investment-grade ratings, which means that the issuer is considered financially stable and unlikely to default.

• Hold a diversified portfolio. You should plan to hold at least seven to nine different issues to ensure adequate diversification. Be careful not to hold an excessive number of individual issues, which can become an administrative struggle. For each bond owned, you need to ensure that interest payments are received, reinvest the interest income, and monitor credit quality, maturity dates, and call dates.

• Consider bonds issued in your resident state. Purchasing muni bonds issued in the state in which you reside generally means that your interest income will also be exempt from state, and sometimes local, income taxes.

• Search until you find a bond that meets your criteria. With so many different bond issues available, you should be able to find one that meets your particular criteria.

• Review your holdings periodically. Review the credit ratings of all your municipal bonds at least annually to make sure the quality hasn’t deteriorated. Check the call provisions so you aren’t surprised by a call in the coming year. Also, review your holdings to see if they are still consistent with your overall investment objectives and asset allocation plan.