I'm wondering just generally if they come with more risk than the treasury or repo-backed ones. Do they stay pegged at the NAV? Do they have more uneven returns because they are muni-backed?
But if you want the context, you can keep reading:
I currently use TTTXX for my money market fund, because it is state-tax exempt.
However, I'm in the 32% marginal federal bracket, 9.3% in my state, and my gains are subject to NIIT as well of 3.8%.
The tax-exempt funds MCSXX and FFTXX both yield \~2.5%, whereas TTTXX yields \~3.5%. Paying 35.8% federal+NIIT on the TTTXX yield of 3.5% reduces the effective yield down to \~2.247%. Whereas the effective yield of the tax-exempt would be \~2.26% after 9.3% in state taxes only.
So, those are basically exactly the same, but I figure that the tax-exempt ones come out ahead because they'd also not contribute to my MAGI.
Is there any downside to using these tax-exempt money market funds if the math works out? Do they come with more risk because of muni bond liquidity, etc? Or is it safe to make the switch?