Municipal bonds, or "muni bonds," comprise debt securities that are issued by various states, cities, counties and other governmental entities to raise money to build roads, schools and a host of other projects for the public good. These municipal securities regularly make interest payments, usually semi-annually, and pay the original investment or principal amount at the time of maturity. Interest paid on such bonds is generally exempt 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, viz., Colorado BondShares A Tax-Exempt (HICOX), T. Rowe Price Tax-Free High Yield (PRFHX) and Franklin High Yield Tax Free Inc (FRHIX). 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 A Tax-Exempt fund seeks opportunities for capital appreciation. HICOX invests 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 A Tax-Exempt fund has three-year annualized returns of 5.9%. Fred R. Kelly has been one of the fund managers of HICOX since 1990.
T. Rowe Price Tax-Free High Yield fund seeks a high level of income exempt from federal income tax by investing primarily in long-term, low- to upper-medium-quality municipal securities. PRFHX invests a substantial portion of assets in below investment-grade municipal or junk bonds and may buy bonds in default as long as they do not exceed 10% of assets.
T. Rowe Price Tax-Free High Yield fund has three-year annualized returns of 4.6%. PRFHX has an expense ratio of 0.65%.
Franklin High Yield Tax Free Inc fund seeks to invest in high-yielding, lower-rated municipal securities from across the nation. FRHIX???invests most of its assets in securities whose interest is free from personal income taxes and federal income taxes, including the federal alternative minimum tax.
Franklin High Yield Tax Free Inc fund has three-year annualized returns of 4.6%. As of the end of August 2025, FRHIX held 63.9% of its net assets in miscellaneous bonds.
To view the Zacks Rank and the past performance of all municipal bond funds, investors canclick here to see the complete list of municipal bond funds.
Want key mutual fund info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week.Get it free >>
Free Report: Profiting from the 2nd Wave of AI Explosion
The next phase of the AI explosion is poised to create significant wealth for investors, especially those who get in early. It will add literally trillion of dollars to the economy and revolutionize nearly every part of our lives.
Investors who bought shares like Nvidia at the right time have had a shot at huge gains.
But the rocket ride in the "first wave" of AI stocks may soon come to an end. The sharp upward trajectory of these stocks will begin to level off, leaving exponential growth to a new wave of cutting-edge companies.
Zacks' AI Boom 2.0: The Second Wave report reveals 4 under-the-radar companies that may soon be shining stars of AI’s next leap forward.
Access AI Boom 2.0 now, absolutely free >>View All Zacks #1 Ranked Mutual Funds
Get Your Free (PRFHX): Fund Analysis Report
Get Your Free (FRHIX): Fund Analysis Report
Get Your Free (HICOX): Fund Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
