Tax Advantages of Investing in Bond Funds
Many bond funds invest in tax-exempt municipal bonds of a particular state. Depending upon your state of residence, the bonds of your state may be exempt from state as well as federal income tax. Not all of the income that you receive from a municipal bond fund, however, will necessarily be exempt from federal and state income tax. The fund's prospectus will describe any of its tax-exempt features.
Source http://www.sec.gov/answers/bondfunds.htm
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