Short-term municipal bond funds, or munis, buy slightly longer-term securities than ultrashort bond funds do.
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.
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