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If you want to buy a bond fund, to go with Vanguard is almost a no-brainer. They have the lowest expenses, and for bonds this helps the bottom line substantially. A fund with higher expenses would have to buy riskier bonds to meet Vanguard's yield.
Some municipal bonds, called "private activity" bonds, may be subject to Alternative Minimum tax. Other than this, you are correct that municipal bonds in the Vanguard fund will not be subject to federal taxation, nor to California taxes. If you are getting less than $100000 or so of bonds, to get them in the form of a bond fund rather than individual bonds makes sense. As your portfolio grows, you might consider getting individual issues.
Why individual bonds? A bond fund has no maturity date. The manager is buying and selling hoping to improve yields. Also, as a bond matures, the money is used to buy another. If you buy a long term bond fund and hold it for 30 years, you still have a long term bond fund. If you buy a 30 year bond and interest rates drop, you still collect your interest every six months and receive your principal back, face value. You get your money back. With a bond fund, if prices drop they may not recover and there is no guarantee that the price of the fund in any number of years will return the money you originally put into it.
With individual bonds your trading expenses, buying perhaps $10000 at a time, are much more than those of a mutual fund manager that buys millions at a crack. But the way bonds are sold, the yield to maturity and current yield are given to you, information about call dates is provided, and you aren't told the commission. Don't sweat that--worry about what you get, not what the person selling the bond to you gets. Best, Chris
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