Summary of Municipal Bond Funds

If you need tax-free income with low volatility in a diversified portfolio, then you ought to consider municipal bond mutual funds. Composed of debt obligations of states, cities, and their subdivisions, municipal bonds provide tax-free interest income backed by the creditworthiness of municipalities and their assets. Municipal bond funds combine many local bonds into a diversified portfolio of municipal bonds and notes.

While they generate dividends free of income tax, you do need to be careful about potential capital gains taxes generated either when a fund sells its bonds or when you sell your fund shares. Be sure to read the fund's prospectus and evaluate your tax situation before investing, to determine whether a municipal bond fund is suitable for you.