By Matthew Heimer

If you were a retiree living in Virginia, and someone recommended that you buy a “Virginia municipal bond fund,” you might conclude that all the money you sank into the fund would be invested in bonds issued by Virginia state and local governments. You’d be reaping that tax-free bond income right close to home.

Puerto Rico, you triple-tax-free island.

A totally reasonable conclusion—and, it turns out, totally wrong. In fact, as Tom Lauricella reports this week in The Wall Street Journal. so-called single-state muni funds like our hypothetical Virginia fund can invest in bonds from all over the country, and almost all of them do. That matters, because even if your fund is nominally based in a part of the country where public balance sheets are sound, it may well hold bonds from someplace relatively shaky. Someplace like, say, Puerto Rico, whose municipal bonds have been in a tailspin for much of this year due to concern over the U.S. territory’s finances, as MarketWatch’s Ben Eisen recently wrote .

It may sound like a case of false advertising, but nobody is accusing the nation’s hundreds of single-state funds of doing anything wrong. As Lauricella explains, the names on those funds “arent intended to describe the funds holdings, but rather the home states of those investors for whom the income from the funds will be considered tax-free.” In other words, your Virginia bond fund has an ambit to invest in any bond whose income would be spared from federal and other taxes in Virginiano matter where the bond originated.

Puerto Rican municipal bonds, like the debt of other U.S. territories (Guam, the U.S. Virgin Islands), is “triple tax free,” exempt from federal, state and local taxes. That, combined with the relatively high yields the bonds pay, means that Puerto Rican debt has wound up in the portfolios of most single-state funds—at least two-thirds of the 339 such funds tracked by Morningstar, by Lauricella’s count. Often, those stakes are relatively large: About 40% of the funds had 4% of their assets in Puerto Rican debt as of Sept. 30, and about 60 funds have 7% or more.

The biggest bettors on the Caribbean commonwealth? Ten single-state funds—nine of them managed by the Oppenheimer fund family—had 22.6% or more of their assets in Puerto Rican debt. At the top of the list: Oppenheimer Rochester VA Municipal (ORVAX), with 33.3%. (See? I used Virginia as a hypothetical for a reason.) An Oppenheimer investing executive tells Lauricella that the bonds face little risk of default. Duly noted.

The takeaway: Municipal bonds may have a sleepy reputation, but bond fund managers face the same pressures as any other investing pros to find an edge and beat the market. It always pays keep an eye on your prospectus to see what kinds of risks your fund is taking.

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Matthew Heimer covers retirement for MarketWatch and edits the Encore blog. Follow him on Twitter @MatthewHeimer.