The Ultimate Tax Free Mutual Funds Quiz

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About This Quiz

Tax-free mutual funds are one of the most popular types of investments. Rather than invest only your money, you can benefit from power in numbers while saving on taxes. Are these mutual funds the right choice for you? Take our quiz to find out what you know about investing in tax-free mutual funds.

Which of these best describes the advantage of investing in a mutual fund?

Mutual funds invest many people's money together, which means they have greater investing power, but far less risk.

Approximately what percentage of American investors own shares of mutual funds?

About 80 percent of American investors have some money tied up in mutual funds, making these funds one of the most popular ways to invest.

Which of these statements best defines diversification?

The term diversification refers to investing in a broad range of stocks, rather than just one or two popular ones. The idea is that diversification reduces risk.

When did the idea of an investment trust with pooled funds first appear in the United States?

Trusts of this sort have been part of the American investment world since the late 1890s.

Which of these statements best defines liquidity?

The term liquidity refers to the degree to which you can convert an investment into actual money without it losing value.

One of the drawbacks of investing in a tax-free mutual fund is which of these concerns.

There is a longstanding investment idea of risk versus reward; the higher the risk, the higher the potential reward. Mutual funds are a relatively low-risk investment, which means they have a lower rate of return on investment.

Approximately how many mutual funds are there in the United States?

As of 2009 there were more than 8,000 mutual funds in the United States.

Which type of mutual funds are tax-free?

For a mutual fund to qualify for tax-free status it may only invest in tax-exempt municipal bonds.

What type of an investment is a bond?

When you purchase a bond you are basically loaning that amount of money to an organization. The bond matures at a set date, and until then the company pays you regular interest payments.

Which of these organizations might issue a municipal bond?

Municipal bonds are non-federal government bonds. They are issued by state and local government organizations in need of a financial boost.

Municipal bonds account for what percentage of mutual fund bond assets?

As of 2008, municipal bonds made up one quarter of all mutual fund bond assets.

Why is the liquidity of a bond fund greater than that of an individual bond?

If you purchase an individual bond, you must wait for it to mature before cashing it. A bond fund can be cashed at anytime; you will receive the current per share value of the fund.

Who guarantees your investment when you purchase municipal bonds?

Municipal bonds are issued by a government body, and are financially backed by that body. When you invest in a state-run water facility, your investment is backed by that state.

Even though they are called tax-free mutual funds, you might have to pay which of these taxes on the income you earn from them?

The profit you make from investing in a mutual fund may be subject to capital gains taxes, even if you invested in a tax-free fund.

Which of these terms refers to a detailed description of a mutual fund's history and activities?

A prospectus is a detailed overview of an investment opportunity. A mutual fund prospectus will include details about its history, management, services, and other related details.

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