Investors interested in a tax-free stable income may consider municipal bond mutual funds. Municipal bonds or "munis" are preferred by investors seeking a steady stream of tax-free income in a volatile market. Though munis come with lower yields than taxable bonds, they fetch better returns for investors in high tax brackets if we consider after-tax returns.
California municipal bond mutual funds form one of the main segments in this category. These funds invest in municipal debt obligations of the issuers from the state. These mutual funds are expected to offer the state's investors a steady income which is exempted from federal income tax and California state income tax.
Below we share with you three top-rated California muni bond mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future.
Franklin California High Yield Municipal A (MUTF:FCAMX) seeks a high tax-free income. FCAMX invests a large share of its assets in municipal securities that pay interest, which is exempted from taxes collected by the government and the state of California. The fund may also invest all of its assets in instruments that provide return which is not exempted from federal alternative minimum tax. FCAMX may invest a maximum of 35% of its assets in municipal bonds approved by the U.S. territories including Puerto Rico. The Franklin California High Yield Municipal A fund returned 3.1% in the past three months.
John S. Wiley is one of the fund managers of FCAMX since 1993.
American Century California High Yield Muni A (MUTF:CAYAX) invests a large chunk of its assets in municipal securities that are believed to provide interest income free from federal and California income taxes. CAYAX focuses on acquiring California municipal securities that are rated below investment grade. The fund may also invest in securities that are unrated. American Century California High Yield Muni A is a non-diversified fund that returned 3.2% in the past three months.
As of December 2015, CAYAX held 371 issues, with 3.61% of its assets invested in Foothill/Eastern Transn Corr Ref Re 6%.
Invesco California Tax-Free Income Y (MUTF:CLFDX) seeks tax-exempted high income. CLFDX invests the major portion of its assets in California municipal securities that provide interest income exempted from federal and California state income taxes. The fund focuses on acquiring securities that are considered investment grade. CLFDX may also invest not more than 20% of its assets in junk bonds. The Invesco California Tax-Free Income Y fund returned 2.8% in past three months.
CLFDX has an expense ratio of 0.61% compared with the category average of 0.90%.