Municipal bond fund

Municipal bond mutual funds invest in municipal bonds. Earnings from these funds are always free of federal income tax for all shareholders in the fund.

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 of money than they would need to buy a municipal bond on their own. Another advantage of these funds is that they pay income monthly rather than semi-annually.