These funds may provide the investor a stream of tax-free income for both state and federal income tax purposes. I have a number of clients who have benefited from holding municipal bond funds because of their favorable tax treatment.

NATIONAL MUNICIPAL BOND FUNDS. Bonds and other securities that are issued by states, cities, and other municipalities make up national municipal bond funds. The underlying bonds and securities may be from all over the country, or they may be geographically centered. Some of these bond funds invest only in high-quality bonds, while others will invest in lower-quality, or junk, bonds. The bonds may have a variety of maturities. The income from these funds is taxfree for federal income tax purposes.

STATE MUNICIPAL BOND FUNDS. These funds are state specific and are designed to provide the investor with tax-free income for federal, state, and local income tax purposes, provided that the investor is a resident of that specific state. All types of bonds from cities and counties within a state are used in these funds.