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 pay 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 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., Colorado BondShares Tax-Exempt HICOX, American Funds Tax-Aware Conservative Growth and Income Portfolio TAIAX and Invesco Limited Term Municipal Income AITFX. 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.
Colorado BondShares Tax-Exempt seeks to invest up to 100% and at least 80% of the value of its net assets in tax-exempt bonds and other tax-exempt securities, including tax-exempt notes and tax-exempt municipal leases of the State of Colorado, its political subdivisions, municipalities and public authorities.
Colorado BondShares Tax-Exempt has three-year annualized returns of 4.5%. As of December 2024, HICOX had 30.8% of its assets invested in Total Misc. Bonds.
American Funds Tax-Aware Conservative Growth and Income Portfolio invests in a variety of U.S. funds in different combinations and weightings. The funds that it invests in generate income from their investments and may include growth-and-income, equity-income, balanced and fixed-income funds.
American Funds Tax-Aware Conservative Growth and Income Portfolio has three-year annualized returns of 7.2%. Andrew B. Suzman has been one of the fund managers of TAIAX since 2012.
Invesco Limited Term Municipal Income seeks income exempted from federal tax by investing most of its assets in investment-grade municipal debt securities that either pay interest, are excluded from gross income for federal income tax purposes, or do not produce income that will be considered an item of preference for purposes of the alternative minimum tax. AITFX advisors try to maintain a dollar-weighted average with effective portfolio maturity of five years or less.