How Do Tax-Free Mutual Funds Work?

When dealing with mutual funds, tax implications is something that you have to consider. A tax-free mutual fund offers investors a unique opportunity to save money. Here are the basics of a tax-free mutual fund and how they work.

Tax-Free Funds

A tax-free mutual fund is one that invests in municipal bonds and government bonds. A municipal bond can be issued by city governments, county governments, school systems and airports. This is done to raise money for some sort of project. The bonds that the issue are debt instruments that investors can purchase. The municipalities then pay a certain amount of interest to the bondholders. The interest that is received is tax-free for the investors.

Investment Considerations

Buying municipal bonds is a popular strategy with many investors. However, it typically takes at least $5000 to get involved in this market. Mutual funds that invest in municipal bonds allow other investors to get involved. The mutual fund purchases the bonds and investors can get involved for much less money.

In order to determine whether this is a good investment for you, compare the interest rate that you will receive against other interest rates after taxes are withdrawn. This will give you an indication of whether or not it is worth pursuing.

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