Mutual funds having significant exposure to municipal bonds, which are also known as “munis,” provide an excellent choice for risk-averse investors looking to derive stable tax-free return. 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 the reason why investors prefer these securities during a choppy market. Though munis are expected to provide lower yields compared to taxable bonds, they fetch better returns for investors in high tax brackets if we consider after-tax returns.

Below we will share with you 5 top rated municipal bond mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all municipal bond funds, investors can click here to see the complete list of funds .

Invesco High Yield Muni A (ACTHX – MF report) seeks current income exempted from federal tax. ACTHX invests the majority of its assets in municipal securities. ACTHX invests a minimum 75% of its assets in municipal securities that are rated as either medium- or lower grade securities, while it invests a maximum 25% of its assets in industrial development revenue bonds. The Invesco High Yield Muni A fund has returned 3.1% over the past three-month period.

ACTHX has an expense ratio of 0.86% as compared to the category average of 0.97%.

Dreyfus Municipal Bond (DRTAX – MF report) invests almost 100% of its assets in municipal debt securities that are expected to provide return exempted from federal income tax. DRTAX invests the majority of its assets in securities that are rated A or higher. DRTAX is believed to maintain a dollar-weighted average maturity of more than 10 years. The Dreyfus Municipal Bond fund has returned 2.5% over the past three-month period.

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