Because they carry longer durations, short-term muni funds are more sensitive to interest-rate shifts than ultrashort funds. Therefore, they gain more than ultrashort funds when interest rates drop.

Buying an insured muni fund won't lessen the interest-rate risk. While insurance protects against defaults, it can make funds even more vulnerable to rate changes.

If you're saving for a home or another longer-term goal and you can weather some rougher patches, short-term muni funds fill the bill--especially if you're in a high federal-tax bracket. That's because these funds only buy municipal bonds, whose interest is exempt from federal income taxes.

For some muni-fund recommendations, read our  Fund Analyst Picks. (Fund Analyst Picks are available to Premium Members only, but nonmembers can sign up for a free trial.)

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