Mutual funds having significant exposure to municipal bonds, also known as "munis," are excellent choices for risk-averse investors looking to derive stable tax-free returns. These funds 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 why investors prefer these securities in a choppy market. Though munis are expected to provide lower yields than taxable bonds, they fetch better returns for investors in high tax brackets if we consider after-tax returns.
Below we share with you four top-ranked municipal bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) and is expected to outperform its peers in the future.
American High-Income Municipal Bond Fund F-2 (MUTF:AHMFX) seeks high income free from federal income tax. AHMFX invests the lion's share of its assets in securities which are free from federal income tax. The fund invests at least half of its portfolio in debt securities which are BBB+ or below or Baa1 or below rated. American High-Income Municipal Bond Fund F-2 has returned 1.9% over the last one-year period.
AHMFX has an expense ratio of 0.48% compared with the category average of 0.95%.
AB Municipal Bond Inflation Strategy Advisor (MUTF:AUNYX) invests a bulk of its assets in fixed-income securities which are rated A or better or have the equivalent rating by one or more rating agencies. AUNYX may invest almost one-fifth of its assets in fixed-income securities which are rated BB or B or equivalently rated by various rating agencies. The fund seeks maximization of real after-tax returns for investors. AB Municipal Bond Inflation Strategy Advisor has returned 2.4% over the last one-year period.
As of March 2017, AUNYX held 198 issues, with 3.55% of its assets invested in Maryland St Go Bds 5%.
AB Municipal Income Fund II Virginia Portfolio A (MUTF:AVAAX) seeks to maximize income free from both federal income tax as well as Commonwealth of Virginia personal income tax. AVAAX primarily invests in municipal securities which pay interest that is free from federal income tax. AB Municipal Income Fund II Virginia Portfolio A has returned 1% over the last one-year period.
Fred Cohen is one of the fund managers of AVAAX since 2002.
MFS® Municipal Limited Maturity Fund I (MUTF:MTLIX) invests a major portion of its assets in securities and other investments whose interest is free from federal income tax. MTLIX's investment adviser generally invests in municipal instruments. The fund seeks high income free from federal income tax. MFS Municipal Limited Maturity Fund I has returned 1.4% over the last one-year period.
MTLIX has an expense ratio of 0.54% compared with the category average of 0.69%.