I will soon do a post on teaching teens about mutual funds in general, but I firmly believe in teaching investment vehicles in a certain order. I know it sounds strange to talk about a specific example of a mutual fund before you give a general definition, but in this case—where teens are the audience—the information should be cumulative.

So the order should be, first teach stocks, then municipal bonds, then municipal bond funds. Then expand out to general mutual funds, where all the lessons they have learned so far will gel, because mutual funds contain both stocks and bonds.

Stay with the local angle to teach about bond funds and make the primer lesson about municipal bond funds. They really will maintain better interest. Also, municipal bond funds are on the safer side, and better to teach safest first.

So here are the 3 steps:

1. First, a definition: A municipal bond fund is a type of mutual fund. Essentially, it’s a collection of municipal bonds that an investment specialist manages. More than one person buys into a bond fund. So the investment specialist pools money from different people, then buys and sells bonds, depending on their value, keeping a set arsenal of them at all times.

Municipal bond funds tend to have lower returns (less interest to be earned), but are also lower risk and come with tax advantages. Lower risk means the bonds are issued by localities that are established, with low debt and a good track record, and often pay dividends. (In a more advanced investing post, I will go into choosing stocks and bonds on the basis of good dividends, because it’s a barometer of a stable company or municipality.) For the risk averse, municipal bond funds are a good diversified investment.

2. Have your teen go to municipalbonds.com and choose two municipal bond funds to track. Make them both local. Have them chart differences of return on investment over the past 10 years. See if they can find out why one is performing better than the other.

3. Then have them search on best performing funds in the state and compare it to another state municipal bond fund. Have them choose a state they dream of going to college in, or just like for some reason.

My favorite thing about teaching municipal bond funds is that kids get a very broad education about how their local and state governments manage money. It may spark interest in local politics and news. Kids tend to be loyal, so the comparison to another state will pique their interest. They’ll want their state to be better.

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