Abstract

 
 
 In this paper, we analyze the investment performance of two types of open-end munici- pal bond mutual finds: first, mutual funds that have the objective of generating income free from federal income taxes; second, funds that have the objective of generating income free from not only federal but also a particular state’s income taxes. Our results suggest the following: first, municipal bond fund monthly returns either mirror or lag the Lehman Brothers Municipal Bond Index returns on a risk-adjusted basis; second, when state taxes are significant, such as in California and New York, the investor benefits from investing in state-specific municipal bondfunds.
 
 
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