Tax-Exempt Long-Term Bond Funds

Tax-exempt long-term bond funds are mutual funds that invest in municipal bonds issued by states, cities, counties, towns, boroughs and hamlets. There are two general categories of bonds that municipalities issue: general obligation bonds backed by the municipality's total revenue and special revenue bonds backed only by the revenue from a certain source.

Investing in tax-exempt long-term bond funds has several advantages. The biggest advantage that these bonds have is evident from their name--that is, the interest you receive is not taxed at the federal level. Also, you may escape tax at the state level as well because the majority of states do not tax residents of their state on municipal bonds issued within the state. This may help to offset the disadvantage of municipal bonds, namely that their interest rates are on the lower end of the scale because they're pretty safe investments backed by state and local governments.

Warning Municipal bonds are pretty safe on the risk scale for investment vehicles. However, they are not as safe as treasuries. Unlike the federal government, some municipalities go bankrupt. The low-risk associated with federal government bonds lies in the fact that they're obligations of the U.S. government. The chance that the federal government will renege on you is pretty close to nil. In other words, in the world of securities investing, U.S. treasuries are as close to a sure thing as you'll ever get.