High-yield bond mutual funds are those that invest in non-investment grade bonds, also known as junk bonds. These funds are expected to provide better returns than securities with higher ratings. Also, due to their higher yield feature, junk bonds are believed to be less susceptible to interest rate fluctuations. Though bonds that are rated below investment grade are believed to be riskier than investment grade bonds, a well-diversified portfolio of such securities bears a lower level of risk.
Moreover, high-yield municipal bond mutual funds provide an excellent opportunity for investors interested in deriving healthy tax-exempted returns. Funds that invest in municipal bonds, also known as "munis", seek to provide returns with a low level of risk by investing in municipal debt securities issued by state and local governments. These securities are believed to provide steady returns exempted from federal taxes and in many cases, from state taxes as well, which is the reason why investors prefer these securities in a choppy market.
Below, we will share with you four top-rated, high-yield municipal bond mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) as is expected to outperform its peers in the future.
American High-Income Municipal Bond F-1 (MUTF:ABHFX) invests a large chunk of its assets in debt securities whose interest is exempted from regular federal income tax. ABHFX may invest in bonds having interest, which is a tax-preference item for the purpose of the federal alternative minimum tax. American High-Income Municipal Bond F-1 has a three-year annualized return of 6.3%.
ABHFX has an expense ratio of only 0.74% compared with the category average of 0.99%.
Invesco High Yield Muni Y (MUTF:ACTDX) seeks current income exempted from federal tax. ACTDX invests the majority of its assets in municipal securities, with more than 75% of its investment are made in municipal securities with high yield. Invesco High Yield Muni Y has a three-year annualized return of 7.9%.
Robert Stryker is one of the fund managers of ACTDX since 2015.
Franklin California High Yield Municipal A (MUTF: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. FCAMX may also invest all of its assets in instruments that provide returns not exempted from federal alternative minimum tax. Franklin California High Yield Municipal A has a three-year annualized return of 6.7%.
FCAMX has an expense ratio of only 0.65% compared with the category average of 0.93%.
Lord Abbett High Yield Municipal Bond F (MUTF:HYMFX) invests the lion's share of its assets in municipal debt securities that are believed to provide return exempted from federal income tax. It is expected to maintain a dollar-weighted average maturity of 10 to 25 years. Lord Abbett High Yield Municipal Bond F has a three-year annualized return of 6.8%.
As of November 2016, HYMFX held 530 issues, with 1.28% of its assets invested in New York Liberty Dev Corp Libe Rev Bd 5%.