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 municipal bond funds, namely, American Funds Tax-Aware Conservative Growth and Income Portfolio TAIAX, Vanguard Ltd-Term Tax Exempted VMLTX 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.

American Funds Tax-Aware Conservative Growth and Income Portfolio invests most of its net assets in a variety of funds from the United States in various combinations and weights to generate income from their investments and may include growth-and-income, equity-income, balanced and fixed-income funds. TAIAX also focuses on dividend-paying stocks and invests a portion in emerging markets.

American Funds Tax-Aware Conservative Growth and Income Portfolio has three-year annualized returns of 4.4%.As of the end of April 2024, TAIAX had 7 issues.

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%. VMLTX has an expense ratio of 0.17%.

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.