On the guitar or bass, this is when you strum normally but slightly release the tension from the fretting hand, while still maintaining contact with the strings. Often, muted strums are interspersed within regular strums, creating a rhythm of strummed chords/muted strums. This is a common technique in funk rhythm playing as well as in other styles.
Muted strumming is similar to fret-hand muting, the difference being that fret-hand muting does not necessarily imply continued strumming once the strings are muted. Fret-hand muting is more generally used to stop a string that is ringing from sounding.