Tax-Exempt Fund

Tax-Exempt

as of March 31, 2013

The Tax-Exempt Fund experienced an up and down quarter, but ended the period flat, with a return of 0.0%. Yields on longer-term tax-exempt bonds rose slightly, while intermediate- and short-term rates fell somewhat. The technical environment for the municipal market was very positive to start the year as new-issue supply was limited and demand was strong. Higher marginal tax rates also fueled demand and highlighted the benefits of tax-free income. Aside from tax-rate changes, nothing new came from Washington with regard to the municipal market. Still, some rhetoric regarding potential changes to municipal bonds’ tax-exempt status is still out there. The Fund owns high-quality, liquid securities, which we believe should add value if we need to shift our positioning, but we expect that the current policy regarding municipal tax exemption will remain unchanged.

In the latter half of the quarter, we increased the Fund’s duration from its neutral position to capitalize on higher rates. We also added holdings in the 10-year range and reduced the Fund’s cash position. Demand for New York-domiciled issues was strong to start the year, and we took advantage of this by selling some of our New York-issued holdings into the demand.

Volatility remains higher than normal in the municipal market, providing opportunities to capitalize on bonds that offer attractive relative value. Expecting that new-issue supply will likely increase, we may use the second quarter as an opportunity to position the Fund for a potentially positive technical summer period for the municipal bond market.

If you are an investor who favors current income exempt from regular federal income tax, this Fund may be ideal for you. It is particularly well suited for income-oriented investors in higher tax brackets willing to assume some risk. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.

Maintain a dollar-weighted average maturity range, under normal circumstances, between 10 and 30 years. This segment of the municipal market, while potentially more volatile, also may provide higher yields than shorter-term securities.
Invest in high-quality securities, primarily investment-grade debt.
Select investments on the basis of their relative value with a focus on total return.

Not FDIC insured | May lose value | No bank guarantee

†Northern tax-exempt fixed income funds' Average Duration is calculated using the modified duration formula. Other Northern fixed income funds show the option-adjusted duration. Duration is a measure of a bond fund's sensitivity to changes in interest rates.

*Distribution rate and tax-equivalent distribution rate represent the annualization of the Fund's distributions for the prior month ending on the date shown, including capital gain distributions. The 30-day SEC yield and tax-equivalent 30-day SEC yield represent the annualization of the Fund's net investment income, excluding capital gain income. The tax-equivalent distribution rate and tax-equivalent 30-day SEC yield are based on an assumed tax rate of 47.9% for Arizona, 53.7% for California and 43.4% for national municipal funds.

**Per share paid out March 25 with a record date of March 22. The amount shown represents dividends paid for net investment income and excludes distributions from capital gain income.

Please carefully read the prospectus and summary prospectus and consider the investment objectives, risks, charges and expenses of Northern Funds before investing. Call 800-595-9111 to obtain a prospectus and summary prospectus, which contains this and other information about the funds.