Question

"An investor buys $10,000 of a "regulated" mutual fund investing solely in municipal securities. Which statement is TRUE regarding the Federal tax treatment of the interest income?"

Answer 1

Answer: D. The investor has no tax liability on distributions received, and the investment company has no tax liability on retained income

Explanation:

Municipal Securities are exempt of Federal taxes and this is what makes them most attractive. An investor in a mutual fund which invests solely in municipal securities will therefore not have any tax liability because their returns would be based on securities that are federally tax exempt. The same goes for any income the Mutual fund intends to retain.