Municipal bond fund

Municipal bond fund

A mutual fund that invests in bonds issued by state, city, and/or local governments. The interest obtained from these bonds is passed through to shareholders and is generally free of federal (and sometimes state and local) income taxes.

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municipal bond fund

A mutual fund that invests in tax-exempt securities and passes through tax-free current income to its shareholders. Some municipal bond funds purchase long-term securities that provide a relatively high current yield but vary substantially in price with changes in interest rates. Other funds choose short-term securities that have lower yields but fluctuate little in value. Municipal bond funds differ from municipal bond unit trusts in that the funds manage the bond portfolios and charge an annual management fee. See also double-exempt fund, junk muni-bond fund, tax-exempt money market fund.

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Municipal Bond Fund

A mutual fund that invests predominantly or exclusively in municipal bonds. A municipal bond fund is often tax-efficient, as municipal bonds are exempt from federal taxes and in some circumstances also from state and local taxes. As a result, municipal bond funds tend to be attractive to persons who fall into higher tax brackets. Municipal bond funds generally carry lower risks than mutual funds investing primarily in stocks, but the levels of risk vary according to the credit ratings of the municipalities whose bonds are represented in the fund.

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Municipal bond fund. Municipal bond funds invest in municipal bonds. Interest earnings from these funds are free from federal income tax but may be subject to the alternative minimum tax (AMT).

In addition, some mutual fund companies offer funds that invest exclusively in municipal bonds offered by a single state.

One advantage of muni bond funds is that buyers can invest a much smaller amount than they would need to buy a municipal bond on their own. Another advantage is that they pay income monthly rather than semiannually.