Municipal Tax-Free Bond Funds

Municipal bond funds invest in the obligations of state and local government
agencies. The interest income from municipal bond funds is generally exempt
from Federal income taxes (although any capital gains would be subject to
taxation). Investors who are taxed at one of the higher marginal rates generally
will benefit by investing in a municipal bond fund rather than a taxable bond
fund. If you buy a bond fund that limits its investments to the state in which you
reside, you may earn income that is exempt from state and local income taxes as
well.

Like their taxable counterparts, tax-exempt bond funds are available in a range
of maturity levels, including short-term, intermediate-term, and long-term. Most
municipal bond funds purchase only investment-grade issues; some go one step
further in credit quality, emphasizing municipal bonds that are insured by private
insurance companies. There are also municipal bond funds that specialize in
high-yield or lower quality municipal bonds, too.
