Interest income exempt from federal income tax is among the many distinct advantages that municipal bonds offer to investors. They also show very little correlation with returns from equity investments. Thus, they offer relatively high yields at lower levels of risk and are considered second only to government securities in terms of safety of capital invested. By holding a well diversified portfolio of such securities, mutual funds significantly lower the associated default risk.

Below we will share with you the 5 highest yielding Zacks #1 ranked municipal bond mutual funds. Each has earned a Zacks #1 Rank (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.

Oppenheimer AMT-Free Municipals A (OPTAX) seeks high current income free from federal income taxes. The fund primarily invests in municipal securities exempt from federal individual income tax. At least 25% of its assets are used to purchase securities below investment grade. The municipal bond mutual fund returned 16.4% in the last one year period.

The municipal bond mutual fund has a minimum initial investment of $1,000 and an expense ratio of 0.74% compared to a category average of 1.02%.

MFS Municipal High-Income A (MMHYX) invests the majority of its assets in instruments not subject to federal income tax. It may invest substantially all of its assets in debt securities of low quality. The municipal bond mutual fund returned 11.22% in the last one year period.

The Fund Manager is Gary A. Lasman and he has managed this municipal bond mutual fund since 2006.

Invesco Van Kampen High Yield Municipal A (ACTHX) seeks current income exempt from federal taxes. The fund invests a large proportion of its assets in municipal securities. The fund focuses on acquiring instruments of medium and low quality. The municipal bond mutual fund returned 11.3% in the last one year period.

As of September 2011, this municipal bond mutual fund held 1214 issues, with 0.74% of its total assets invested in New Jersey Econ Dev Auth 6.25%.

Eaton Vance High-Yield Municipal Income A (ETHYX) invests heavily in debt securities issued by the states of the US, the District of Columbia and related government agencies and exempt from federal income tax. The municipal bond mutual fund returned 11.64% in the last one year period.

The municipal bond mutual fund has a minimum initial investment of $1,000 and an expense ratio of 0.99% compared to a category average of 1.02%.

BlackRock High Yield Municipal A (MDYHX) seeks high income exempt from federal income taxes. The fund invests primarily in municipal bonds. At least 65$ of its assets are utilized to purchase bonds of medium to low quality. The municipal bond mutual fund returned 11.83% in the last one year period.

The Fund Manager is Theodore Jaeckel Jr. and he has managed this municipal bond mutual fund since 2006.

To view the Zacks Rank and past performance of all municipal bond funds, investors can click here to see the complete list of funds.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at http://www.zacks.com/funds.

Read the full analyst report on OPTAX

Read the full analyst report on MMHYX

Read the full analyst report on ACTHX

Read the full analyst report on ETHYX

Read the full analyst report on MDYHX