The Benefits Of A Tax Free Income Fund

A tax free income tax fund is one that invests exclusively in municipal bonds. They offer a double tax benefit to the purchaser who is a resident of the municipality that is issued the bonds. The double tax benefit makes tax free income funds attractive to investors seeking steady income without the fear of paying taxes on that income.

What are Tax Free Income Funds

Tax free income funds are investment company mutual fund shares organized in accordance to the requirements of the Investment Company Act of 1940. The funds are treated like securities and must be therefore sold with a prospectus to a new customer. A prospectus is a legal document that sets forth information to an investor regarding the management style, types of holdings and other important information that an investor should know before making any investment decision.

Double Tax Exemption

The double tax exemption is a part of bonds because they are issued locally for public improvement projects. This means that the investor is being given a tax break for investing in their community. 

This tax break is known as double taxation break because of the federal tax exemption that comes from the project. The money for public projects or services are not taxed.

Types of Tax Free Income Funds

Investors looking for stable income invest in municipal tax free income funds. These types of funds are not generally seen as being suitable for an investor looking for long term growth, such as the case as for retirement or looking to fund a mid-range goal like college education.  The returns that are typically associated with a tax free income fund are relatively low when compared to other investments. This low rate of return is not advantageous to long term investors but provides benefits for a retiree living on a fixed income.

Where to Buy Tax Free Income Funds

Tax free income funds are sold by mutual fund companies directly and can also be purchased in banks and other institutions that offer securities. Also, tax free income funds can be purchased online, by visiting the website of the fund company that offers these funds. A qualified financial or tax advisor can work with a client to determine the appropriateness of the investment.