Dws Tax-Free Money Fund: Where Does It Invest?

The DWS Tax-Exempt Money Fund is a mutual fund that seeks to provide income exempt from federal income taxes, with a focus on stability of capital. The fund primarily invests in municipal securities, municipal trust receipts, and other debt instruments offered by municipalities across the United States. These investments are chosen for their potential to generate attractive yields while maintaining a stable share price. The fund is designed for investors in moderate to high tax brackets who seek tax-exempt income, liquidity, and stability typically offered by money market funds. While the fund aims to preserve an investor's capital, it is important to note that there are risks associated with money market funds, including liquidity and transaction risks, municipal securities risk, security selection risk, and more.

Municipal securities

Municipal Bonds

Municipal bonds are debt securities issued by local, county, and state governments or governmental entities. They are typically sold in minimum increments of $5,000, pay interest semi-annually, and have maturities ranging from less than a year to 30 years. Municipal bonds are used to raise money for various projects that serve the public good, such as building roads, schools, bridges, and other infrastructure projects. These bonds act like loans, with investors becoming creditors. In exchange for the loaned capital, investors receive interest on their principal balance, which is repaid by the maturity date.

Municipal bonds are often exempt from most taxes, including federal income tax and sometimes state and local taxes for residents of the issuing state. This makes them attractive investments for individuals in higher income tax brackets. The interest rates for municipal bonds are usually lower than taxable fixed-income securities due to the tax benefits.

There are two main types of municipal bonds:

• General obligation bonds are issued by states, cities, or counties and are not secured by any specific assets. Instead, they are backed by the "full faith and credit" of the issuer, which has the power to tax residents to pay bondholders.
• Revenue bonds are backed by revenues from a specific project or source, such as highway tolls or lease fees, rather than the government's taxing power. Some revenue bonds are "non-recourse," meaning that bondholders do not have a claim on the underlying revenue source if it dries up.

Municipal Fund Securities

Municipal fund securities include 529 Savings Plans and ABLE Programs. 529 Savings Plans are established by states to help investors pay for qualified education expenses, while ABLE Programs are savings accounts designed for individuals with disabilities and their families.

In summary, municipal securities encompass both municipal bonds issued by governmental entities and municipal fund securities, offering investment opportunities with potential tax advantages.

Municipal trust receipts

The bank retains ownership of the goods and issues a trust receipt as a notice of the release of the goods to the municipality. The municipality is allowed to hold and sell the goods in trust for the bank, for manufacturing or sales purposes. The trust receipt serves as a promissory note, assuring the bank that the loan will be repaid upon the sale of the goods.

The maturity dates for such agreements are short-term, typically ranging from 30 to 180 days. At maturity, the municipality must repay the loan to the bank, including any stipulated interest. If the municipality defaults on its payment, the bank has the right to repossess and dispose of the goods.

The DWS Intermediate Tax-Free Fund and the DWS Massachusetts Tax-Free Fund are examples of investments that seek to provide income exempt from specific taxes. The former invests primarily in securities issued by municipalities across the United States, while the latter focuses on Massachusetts municipal securities. These funds aim to limit principal fluctuation and offer stable returns while minimising taxes.

General obligation and revenue notes and bonds

DWS Tax-Free Funds invest in securities issued by municipalities. For example, the DWS Intermediate Tax-Free Fund invests in securities issued by municipalities across the United States, while the DWS Massachusetts Tax-Free Fund invests in Massachusetts municipal securities.

Now, general obligation and revenue bonds are two types of municipal bonds. Municipal bonds are debt issued by states, cities, and counties to fund projects. They are commonly known as "muni bonds". Both general obligation and revenue bonds are sold to raise money for income-producing projects, such as toll roads, bridges, or parks. However, the key difference is the source of the revenue used to make the bond's interest and principal payments.

General obligation bonds, also known as GO bonds, are issued by municipalities and are backed by the "full faith and credit" of the issuer. In other words, the municipal issuer can make interest and principal payments using any source of revenue available to them. This may include tax revenues, fees, or the issuance of new securities. The municipality can also raise taxes to offset any fiscal troubles. This is why GO bonds are seen as relatively safe, with defaults being rare.

Revenue bonds, on the other hand, are issued by municipalities to fund projects and are backed by the revenues that those projects bring in. The money raised by the bond offering directly finances the project. Once the project is complete, it generates revenues to pay back the interest and principal on the bonds to investors. Examples of projects include hospitals, airports, toll roads, housing projects, convention centres, and bridges. Revenue bonds are often higher risk than general obligation bonds and, as a result, tend to offer higher yields.

Securities issued by municipalities

Municipal bonds, also known as "munis", are debt securities issued by local, county, and state governments. They are often offered to pay for capital expenditures, such as the construction of highways, bridges, schools, parks, libraries, and other infrastructure. Municipal bonds act as loans, with bondholders lending money to the government in exchange for interest on their principal balance, which is repaid by the maturity date.

The DWS Intermediate Tax-Free Fund and the DWS Massachusetts Tax-Free Fund both invest primarily in municipal securities. The DWS Intermediate Tax-Free Fund invests in securities issued by municipalities across the United States, while the DWS Massachusetts Tax-Free Fund focuses on Massachusetts municipal securities.

Municipal bonds can be divided into two main types: general obligation bonds and revenue bonds. General obligation bonds are issued by states, cities, or counties and are backed by the "full faith and credit" of the issuer, including their power to tax residents to pay bondholders. Revenue bonds, on the other hand, are backed by revenues from a specific project or source, such as highway tolls or lease fees.

Investing in municipal bonds offers certain tax advantages. The interest on municipal bonds is typically exempt from federal income tax and can also be exempt from state and local taxes if the investor resides in the state where the bond is issued. This makes municipal bonds particularly attractive to individuals in higher income tax brackets.

Securities rated highly for credit quality

The DWS Intermediate Tax-Free Fund, for example, normally invests at least 65% of its total assets in municipal securities rated in the three highest credit rating categories. These are the AAA, AA and A ratings issued by Standard & Poor's and Fitch, and the Aaa, Aa and A ratings issued by Moody's.

The credit rating of a security is an important indicator for investors, who use it to assess the risk of buying bonds or other debt instruments. The rating reflects the likelihood that an issuer will default due to bankruptcy. A high credit rating indicates that, in the agency's opinion, the issuer will be able to repay its debts without difficulty.

Credit ratings are not static and are periodically reviewed and updated as the borrower's circumstances change.

Frequently asked questions