Municipal bonds or “muni bonds,” comprise debt securities issued by various states, cities, counties and other governmental entities to raise money for building roads, schools and a host of other projects for the public good. These municipal securities regularly make interest payments, usually semiannually, and the original investment or principal amount at the time of maturity. Interest paid on such bonds is generally exempted from federal taxes, making them especially attractive to people in higher income tax brackets.
Thus, risk-averse investors looking to earn a regular tax-free income may consider municipal bond mutual funds. These funds are believed to provide regular income while protecting the capital invested. While mutual funds from this category aim to provide dividends more frequently than other bonds, they offer greater stability than those primarily focusing on equity and alternative securities.
Below, we share with you three top-ranked municipal bondfunds, viz., Eaton Vance Total Return Bond Fund EBABX, Victory Tax Exempt Short Term Fund USSTX and Vanguard Limited Term Tax-exempt Fund VMLTX. Each has a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of municipal bond funds.
Eaton Vance Total Return Bond Fund invests its net assets in bonds and other fixed and floating-rate income instruments. EBABX advisors also invest in bonds and income instruments that are either rated below investment grade or unrated.
Eaton Vance Total Return Bond Fund has three-year annualized returns of 5.7%.As of December 2025, EBABX had 36.8% of its assets invested in Total Misc. Bonds.
Victory Tax Exempt Short Term Fund invests most of its net assets in investment-grade securities with a short average maturity that provide interest exemption from federal income tax. USSTX advisors’ annual net investment income dividends are also free from federal income tax, including exclusion from the alternative minimum tax for individuals.
Victory Tax Exempt Short Term Fund has three-year annualized returns of 3.8%. USSTX has an expense ratio of 0.54%.
Vanguard Limited Term Tax-exempt Fund invests most of its net assets in municipal bonds with top three credit-rating categories by nationally recognized rating agencies, or determined to be of comparable quality by the fund’s advisors. It also invests a small portion of its net assets in securities with lower credit ratings. VMLTX advisors try to maintain a dollar-weighted average maturity of 2 to 6 years on individual securities.