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Bond Funds: Municipal

Municipal bond funds invest primarily in investment grade, fixed income securities issued by states, cities, and towns, or other entities like transportation authorities and public utilities, although high yield municipal bond funds typically invest in lower quality issues.

Reasons to consider municipal bond funds

  • Interest paid by municipal bonds is generally exempt from federal income tax.
  • Total returns could potentially be higher than those offered by taxable bond funds, depending on your tax bracket.
  • Funds generally hold investment grade securities that have historically exhibited lower default rates than other types of fixed income assets.

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If you own municipal bonds issued in your primary state of residence, that income may also be exempt from state and local taxes. For this reason, some investors, particularly those who live in states with higher tax rates, may want to consider state-specific municipal bond funds.

Types of municipal bond funds

Municipal national long

Invest in municipal bonds issued by various state and local governments. The income from these bonds is generally free from federal taxes, although a portion may be subject to state and local taxes, as well as the federal alternative minimum tax (AMT). These portfolios typically have durations of more than 7 years (or, if duration is unavailable, average maturities of more than 12 years).

Municipal national intermediate

Invest in municipal bonds issued by various state and local governments. The income from these bonds is generally free from federal taxes, although a portion may be subject to state and local taxes, as well as the federal alternative minimum tax (AMT). These portfolios typically have durations of 4.5 to 7 years (or, if duration is unavailable, average maturities of 5 to 12 years).

Municipal national short

Invest in municipal bonds issued by various state and local governments. The income from these bonds is generally free from federal taxes, although a portion may be subject to state and local taxes, as well as the federal alternative minimum tax (AMT). These portfolios typically have durations of less than 4.5 years (or, if duration is unavailable, average maturities of less than 5 years).

High yield municipal

Primarily invest at least 50% of their assets in municipal securities that are either not rated or that have been given a non-investment grade rating by a major agency such as Standard & Poor's or Moody's, which is considered speculative for municipal securities.

State-specific

Invest primarily in municipal bonds issued in a specific state. Each state-specific category includes long, intermediate, and short duration bond funds. State-specific funds that do not fall into their own state category will fall under municipal single-state long, municipal single-state intermediate/short, or municipal national short. The income from all state-specific funds is generally exempt from federal and state taxes.

Additional Resources

Income-Producing Funds in Fidelity Fund Picks®
See our wide range of mutual fund products that can help you generate income.

Behind the Ratings of Fidelity's Medaled Muni Lineup (PDF)
Read about Morningstar's recognition of Fidelity's municipal bond fund lineup.

Questions?

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information.  Read it carefully.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.)  Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Diversification does not ensure a profit or guarantee against loss.
Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets.
Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely.
Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pretax and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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