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 returns. 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 in 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 share with you three top-rated municipal bond mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform their peers in the future. 

Federated Municipal High Yield Advantage F (FHTFX - Free Report) invests in securities that are believed to provide federal tax free interest income. FHTFX normally invests in long-term securities. The fund may also invest in securities of medium quality and that are rated below investment grade. Federated Municipal High Yield Advantage F is non-diversified and has returned 3.3% over the past one year.

Lee R. Cunningham is one of the fund managers and has managed FHTFX since 2009.

Invesco High Yield Muni A (ACTHX - Free Report) seeks current income exempted from federal tax. ACTHX invests the majority of its assets in municipal securities. The fund 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. Invesco High Yield Muni A has returned 4.4% over the past one year.

ACTHX has an expense ratio of 0.86% as compared to the category average of 0.94%.

American High-Income Municipal Bond A (AMHIX - Free Report) invests a major portion of its assets that provide a federal income tax free return or that have a return subject to minimum alternative federal tax. AMHIX invests a minimum of half of its assets in debt instruments that are BBB+ or Baa1 or below. The fund seeks tax exempted high current income. American High-Income Municipal Bond A returned 3.8% in the last one year.

As of September 2016, AMHIX held 1800 issues, with 1.88% of its total assets invested in Buckeye Ohio Tob Settlement Fi To 5.875%.