Tax Free Money Market Funds

Every smart investor wants an investment which will combine the great features of tax-free yield and low risk in one neat package. This is where tax free money market funds come into the picture. As a rule, investors must pay taxes on their investment gains, usually including federal, state and local taxes.  The interest from municipal bond funds, on the other hand, are exempt from federal taxes and often state taxes as well (most states don’t tax interest payments on bonds issued by its own municipalities).

Put together, taxes can add up to quite a lot of money. Of course, nobody in his or her right mind will contemplate tax evasion. It is a serious crime and people hardly get away with it. On the other hand, it is possible to seek out investments which are considered tax exempt and invest in them.

One very attractive option is the municipal money market fund. This is a form of mutual fund in which the investor’s money is invested in municipal bonds. The beauty of this investment is that, in most cases, municipal bonds are tax exempt. More to the point, municipal bonds on the whole are very safe and offer investors the opportunity to make an income without taking a lot of risk (excepting high-yield varieties, of course). This is the main reason many investors find this option so attractive.

Since most municipal bonds can be quite expensive to diversify if you buy them individually, the best bet of the shrewd investor is to invest in a municipal money market fund. This is a mutual fund that targets only extremely short-duration municipal bonds. One great example of this fund is the Vanguard Tax-Exempt Money Market Fund (VMSXX). This fund has been in existence since 1980 and has consistently given investors an averaged a yield of 3.6%. The VMSXX is a great example of a tax free money market fund.

When most people see the words “tax exempt,” they understandably get excited. Nobody likes paying taxes, after all. However, like  only problem is that this form of investment is not really suitable to the small and medium scale investor. It is more suitable to the high net worth individual. The reason is that municipal bonds have maturity dates which favor people who can tie down their capital for a relatively long time.

Yet, this should not discourage the serious-minded investor. Vanguard has consistently out-performed the average tax-free money market fund due to its ultra-low expenses and strong focus on quality. More to the point, municipal bonds are very safe and these types of funds are very liquid. While there is no such thing as a sure thing in the mutual fund world, these tax free money market funds are almost as close as you’re likely to get.