I had a meeting with an investment advisor a few weeks ago, and he suggested I put money for a home-buying fund into a municipal bond mutual fund. I don't see the point... Interest rates suck right now, so yields are low. At the same time, if they go up, I'll probably end up losing money, because the value of my bonds will decrease.
Am I making sense here? I feel like I'm probably better off just keeping the money in cash (time horizon for buying a house is about 4-5 years).
You might be better off keeping the money in cash.
Munis have had a great run recently. This is partly because interest rates in general have come down and partly because the quality that investors place on muni bonds has improved as city, county, and state budgets improve. I would expect the second factor to continue to improve.
The first factor is largely predictable. A bond fund will publish a "duration." While this has a technical definition, it is approximately the amount the price of the bond fund will fall for every 1% increase in rates. A fund with a 5 year duration will lose 5% of its value if rates go up by 1%. Given the fragile state of the economy and the Feds commitment to keep rates low for at least 2 more years, your principal risk is small.
You also get muni interest federal tax free.
I'm not trying to talk you into it but I also don't think you got bad advice, as long as the advisor was recommending something with low fees and a short duration.