"Muni" bond funds provide higher tax-exempt income than tax-exempt money market funds by investing in longer-maturity (and often lower-rated) securities, which generally offer higher yields than the short-term, high-rated securities in which tax-exempt money market funds invest.

Municipal bond funds vary greatly in the quality and maturity of the municipal bonds they invest in. The longer the maturity, the higher the yield. Also, the lower the credit rating of the issuer, the greater the risk and the higher the yield.

While municipal bond funds generally provide lower yields than income funds with debt obligations of similar maturities and ratings, for an investor in a high marginal tax bracket, the after-tax yields of municipal bond funds will be higher. The price and yield of municipal bond funds will fluctuate moderately with interest rates. As interest rates decline, the value of principal increases while yield decreases; as rates increase, bond prices decline but yields increase.

These bond funds provide the investor with an even greater tax advantage by investing in municipal bonds of a single state. Triple tax-exempt funds are exempt from income tax in a specific city. Thus they generate income exempt from not only federal income tax, but also from state and/or city income tax for residents of those jurisdictions. Like all bond funds, the value of the shares will fluctuate with interest rates, as will the current yield. Also, the stability of principal and yield levels vary with the quality and maturity length of the bonds in which the funds invest. Lack of geographic diversification increases credit risk of these funds compared with national funds.