Municipal bonds, or “muni bonds,” comprise debt securities issued by various states, cities, counties and other governmental entities to raise money to build roads, schools and a host of other projects for public good. These municipal securities make regular interest payments, usually semi-annually, 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 mutual funds are believed to provide regular income while protecting the capital invested. While mutual funds from this category seek 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 bond funds, namely, Vanguard Ltd-Term Tax Exempted VMLTX, MFS Municipal Limited Maturity MTLFX and Nuveen Limited Term Municipal Bond FLTDX. Each has earned 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 funds, their Zacks Rank and past performance.
Vanguard Ltd-Term Tax Exempted 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.
Vanguard Ltd-Term Tax Exempted fund has five-year annualized returns of 1.5%. As of the end of July 2024, VMLTX had 85.6% of its net assets invested in Miscellaneous bonds.
MFS Municipal Limited Maturity fund invests most of its net assets in municipal securities or other investments that are exempt from federal income tax or subject to the federal alternative minimum tax. MTLFX fund’s dollar-weighted average effective maturity does not exceed five years.
MFS Municipal Limited Maturity fund has five-year annualized returns of 1.1%. MTLFX has an expense ratio of 0.59%.
Nuveen Limited Term Municipal Bond fund invests most of its assets, along with borrowings, if any, in investment grade municipal bonds rated BBB/Baa or higher, and the interest paid is exempted from federal personal income tax. FLTDX advisors also invest a small portion of its assets in below investment grade municipal bonds.
Nuveen Limited Term Municipal Bond fund has five-year annualized returns of 1%. Paul L. Brennan has been the fund manager of FLTDX since August 2006.
To view the Zacks Rank and the past performance of all municipal bond funds, investors can click here to see the complete list ofmunicipal bond funds.
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