Tax savings
		Attractive taxable equivalent yields
		Strong after-tax return record
		Diversification
		Comparatively low price volatility
		A word about risk

Tax savings

Tax-free income funds provide monthly income free from federal income tax and, in many cases, state and local taxes.¹

You can choose to receive your monthly dividends by check to meet current income needs or reinvest dividends to take advantage of tax-free compounding for long-term growth.¹

Keep more of what you earn. If you held $100,000 in a taxable investment yielding 4.75% for one year, you would have earned $4,750.² However, depending upon your federal marginal income tax bracket, you could have paid up to $1,662.50 to Uncle Sam and kept only $3,087.50 of your investment earnings.

In comparison, with a tax-free investment yielding 4.25%, you would have earned $4,250 after one year and paid $0 in federal income taxes.^{1, 2}

			Hypothetical Taxable Investment Yielding 4.75%				Hypothetical Tax-Free Investment Yielding 4.25%
			Federal Income Tax Bracket
			28%	33%	35%
	Paid in Taxes	$1,330	$1,567.50	$1,662.50	$0
	Kept	$3,420	$3,182.50	$3,087.50	$4,250
	This chart is for illustrative purposes only and does not represent the performance of any Franklin, Templeton or Mutual Series fund. There is no guarantee that after-tax returns of municipal bonds will be greater than those of taxable investments.

	Footnotes
	1.	For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. To avoid the imposition of 28% backup withholding on all fund distributions and redemption proceeds, U.S. investors must be properly certified on Form W-9 and non-U.S. investors on Form W-8BEN.
	2.	Fund dividends and share price will vary with market conditions. Assumes a fixed rate of return and the stated federal income tax rates. The chart does not reflect any Franklin, Templeton or Mutual Series fund performance or the effects of any state or local taxes.

Attractive taxable equivalent yields

Municipal bonds may offer taxable equivalent yields that are higher than taxable fixed income alternatives. Calculating taxable equivalent yield can help you make an apples-to-apples comparison between tax-free municipal and taxable bonds. It shows you how much more you would have to earn from a taxable bond to compensate for taxes in order to equal or exceed the tax-free yield of a municipal bond.

As shown below, to calculate taxable equivalent yield, divide the tax-free yield of a particular municipal bond by the difference of one minus your tax rate. For example, if the tax-free yield of a hypothetical municipal bond is 4.25%, and your federal tax bracket is 28%, then your taxable equivalent yield would be 5.90%.

Calculating Taxable Equivalent Yield

Therefore, to equal the hypothetical tax-free yield of 4.25%, you'd have to earn 5.90% on a taxable investment.³

A 4.25% Yield from a Municipal Bond
Equals These Taxable Equivalent Yields

This chart is for illustrative purposes only and does not represent the performance of any Franklin, Templeton or Mutual Series fund. Assumes a fixed rate of return of 4.25% and the stated federal income tax rates. State and local taxes, and the effects of the alternative minimum tax, are not reflected.

Footnote
	3.	Assumes a fixed rate of return based on the stated federal income tax rates in effect on 06/27/2008. State and local taxes, and the effect of the alternative minimum tax, are not reflected. Figures do not reflect fund performance. Fund dividends and share prices will vary with market conditions.

Strong after-tax return record

On an after-tax basis, municipal bond returns historically have been second only to equities, outperforming their typically higher-yielding, fully taxable cousins—Treasury bonds and corporate bonds.⁴ Treasury bonds, if held to maturity, offer a fixed rate of return and a fixed principal value; their interest payments and principal are guaranteed.

Historically, Municipal Bonds Have Been The Second Best-Performing Asset Class

After-Tax Average Annual Total Returns
20-Year Period Ended June 30, 2008

Over time, municipal bonds have realized higher after-tax returns than taxable Treasury or corporate bonds. On a pre-tax basis, average annual total returns for stocks, municipal bonds, Treasury bonds and corporate bonds were 10.44%, 7.27%, 8.91% and 8.33% for the 20-year period ended June 30, 2008.⁴ Please note at current tax rates, the performance of the taxable asset classes shown in this chart would have been higher.

The chart is for illustrative purposes only and does not represent the performance of any Franklin, Templeton or Mutual Series fund. For current performance of any Franklin, Templeton or Mutual Series fund, please visit the Fund Performance section or call (800) DIAL BEN/(800) 342-5236.

 

Footnote
	4.	©2008 Morningstar (S&P 500 Composite Index); Lehman Brothers (Long-Term Municipal Bond, Long-Term Treasury and Long-Term U.S. Credit Bond Indexes). Indexes are unmanaged, and one cannot invest directly in an index. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance does not guarantee future results. After-tax returns assume a 20% annual turnover rate, transacted monthly. Investment income and capital gains are taxed at marginal historical federal tax rates consistent with those experienced by individuals earning $100,000 annually. Capital losses are carried forward to offset capital gains in future months. Distributions of capital gains are generally taxable. Effective rates for long-term taxable gains are as follows: 1987-April 1997 = 28%, May 1997-May 5, 2003 = 20%, May 6, 2003-June 2008 = 15%. For investors subject to the alternative minimum tax, all or a portion of the investment may be taxable, depending on the investment.

Diversification

Adding municipal bonds to a stock-heavy portfolio can potentially lower overall portfolio volatility without a significant sacrifice in overall total return.

Historically, diversified portfolios, including both stocks and municipal bonds, have realized higher after-tax returns and lower levels of risk than portfolios combining stocks and taxable Treasury or corporate bonds.^{4, 5}

Municipal Bonds Can Help Reduce Portfolio Risk
without Significantly Sacrificing Return

20-Year Period Ended June 30, 2008

The chart is for illustrative purposes only and does not represent the performance of any Franklin, Templeton or Mutual Series fund. For current performance of any Franklin, Templeton or Mutual Series fund, please visit the Fund Performance section or call (800) DIAL BEN/(800) 342-5236.

	Footnotes
	4.	©2008 Morningstar (S&P 500 Composite Index); Lehman Brothers (Long-Term Municipal Bond, Long-Term Treasury and Long-Term U.S. Credit Bond Indexes). Indexes are unmanaged, and one cannot invest directly in an index. After-tax returns assume a 20% annual turnover rate, transacted monthly. Investment income and capital gains are taxed at marginal historical federal tax rates consistent with those experienced by individuals earning $100,000 annually. Capital losses are carried forward to offset capital gains in future months. Distributions of capital gains are generally taxable. Effective rates for long-term taxable gains are as follows: 1987-April 1997 = 28%, May 1997-May 5, 2003 = 20%, May 6, 2003-June 2008= 15%. For investors subject to the alternative minimum tax, all or a portion of the investment may be taxable, depending on the investment. Past performance does not guarantee future results.
	5.	Volatility, a measure of risk, is determined by the annualized standard deviation of monthly total returns. In general, the higher the standard deviation, the greater the risk.

Comparatively low price volatility

Municipal bond returns have remained relatively stable through a variety of changes in the nation's economic and political climates. By comparing standard deviations, the chart below shows that municipal bonds have been less volatile than both stocks and Treasury bonds over the 20-year period ended June 30, 2008. Standard deviation is used to measure the degree of volatility of an investment. In general, the higher the standard deviation, the greater the volatility.

A word about risk

Municipal bonds are sensitive to interest rate movements, and a fund's yield and share price will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in a fund adjust to a rise in interest rates, a fund's share price may decline.

In general, securities with longer maturities are more sensitive to interest rate changes. Funds with investments concentrated in a single state are subject to greater risks of adverse economic and regulatory changes in that state than a fund with broader geographical diversification. These and other risks are detailed in a fund's prospectus.

A financial advisor can add perspective

If you have questions about investing in tax-free income funds, we encourage you to contact your financial advisor, who is best suited to help you make investment decisions based on your individual investment goals and risk tolerance.