Is FKTFX a Strong Bond Fund Right Now?

Any investors hoping to find a Muni - Bonds fund could think about starting with Franklin California Tax-Free Income A (FKTFX). FKTFX possesses a Zacks Mutual Fund Rank of 2 (Buy), which is based on various forecasting factors like size, cost, and past performance.

Objective

FKTFX is one of many Muni - Bonds funds to choose from. Muni - Bonds funds invest in debt securities issued by states and local municipalities, which are typically used to pay for infrastructure construction, schools, and other government functions. These securities can be backed by taxes (revenue bonds), but others are known as "general obligation" and are not necessarily backed by a defined source. These bonds are especially attractive because of their inherent tax benefits.

History of Fund/Manager

Franklin is based in San Mateo, CA, and is the manager of FKTFX. Franklin California Tax-Free Income A debuted in February of 1977. Since then, FKTFX has accumulated assets of about $6.10 billion, according to the most recently available information. The fund is currently managed by a team of investment professionals.

Performance

Of course, investors look for strong performance in funds. This fund carries a 5-year annualized total return of 0.79%, and it sits in the middle third among its category peers. But if you are looking for a shorter time frame, it is also worth looking at its 3-year annualized total return of 4.03%, which places it in the middle third during this time-frame.

It is important to note that the product's returns may not reflect all its expenses. Any fees not reflected would lower the returns. Total returns do not reflect the fund's [%] sale charge. If sales charges were included, total returns would have been lower.

When looking at a fund's performance, it is also important to note the standard deviation of the returns. The lower the standard deviation, the less volatility the fund experiences. The standard deviation of FKTFX over the past three years is 6.27% compared to the category average of 9.98%. The standard deviation of the fund over the past 5 years is 7.12% compared to the category average of 11.62%. This makes the fund less volatile than its peers over the past half-decade.

Bond Duration

Modified duration is a measure of a given bond's interest rate sensitivity, so when judging how fixed income securities will respond in a shifting rate environment, it is an excellent figure to look at.

For those that believe interest rates will rise, this is an important factor to consider. FKTFX has a modified duration of 7.99, which suggests that the fund will decline 7.99% for every hundred-basis-point increase in interest rates.

Income

We must remember to consider the fund's average coupon, as income is traditionally a big reason for purchasing a fixed income security. This metric calculates the fund's average payout in a given year. For example, this fund's average coupon of 4.89% means that a $10,000 investment should result in a yearly payout of $489.

While a higher coupon is good for when you want a strong level of current income, it could present a reinvestment risk if rates are lower in the future when compared to the initial purchase date of the bond. Since income is just one part of the bond picture, investors need to consider risk relative to broad benchmarks.

Expenses

As competition heats up in the mutual fund market, costs become increasingly important. Compared to its otherwise identical counterpart, a low-cost product will be an outperformer, all other things being equal. Thus, taking a closer look at cost-related metrics is vital for investors. In terms of fees, FKTFX is a load fund. It has an expense ratio of 0.61% compared to the category average of 0.88%. Looking at the fund from a cost perspective, FKTFX is actually cheaper than its peers.

Investors should also note that the minimum initial investment for the product is $1,000 and that each subsequent investment has no minimum amount.

Fees charged by investment advisors have not been taken into consideration. Returns would be less if those were included.

Bottom Line

Overall, Franklin California Tax-Free Income A ( FKTFX ) has a high Zacks Mutual Fund rank, and in conjunction with its comparatively similar performance, average downside risk, and lower fees, Franklin California Tax-Free Income A ( FKTFX ) looks like a good potential choice for investors right now.

For additional information on this product, or to compare it to other mutual funds in the Muni - Bonds, make sure to go to www.zacks.com/funds/mutual-funds for additional information. Zacks provides a full suite of tools to help you analyze your portfolio - both funds and stocks - in the most efficient way possible.

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This article originally published on Zacks Investment Research (zacks.com).

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