Best Intermediate Municipal Bond Funds for the Long Term

Muni bond funds are currently offering unusually high yields.

A vintage financial bond.

In Pictures: 10 Best Intermediate Municipal Bond Funds

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U.S. News is releasing a series of stories highlighting top-rated mutual funds according to various categories. These funds have performed well over the long term, are rated highly among the industry's analysts, and have low minimum investments, making them accessible to all investors—big or small. This is the fifth piece in a series of stories highlighting 10 categories that make up U.S. News's 100 Best Mutual Funds for the Long Term.

The past month has been rough for muni bond funds: Morningstar's intermediate municipal bond category lost 2 percent during that period as skittish investors pulled more than $7 billion out of all muni bond funds, according to the Investment Company Institute. Many cities and states are faced with rising budget deficits, and that has investors worried that some of them could default on their debt.

Those same concerns have pushed up muni bond yields, making them more attractive for different types of investors. Historically, muni bond funds have been primarily used by wealthy investors who purchase the bonds because they're able to take advantage of accompanying tax benefits. (Munis can be free from local, state, and federal taxes, depending on whether you're investing in bonds in your home state.) The downside is that munis typically yield much less than treasury bonds, so the bonds aren't beneficial for most investors in lower tax brackets because they don't generate as much income. That's changed as the U.S. economy continues to slog through a long stint of slow growth.

[See top-rated funds by category ranked by U.S. News Score.]

"Now, when yields are above treasuries and the taxable market overall, it can be a good deal for a much wider group of investors," says Miriam Sjoblom, Morningstar's associate director of fund analysis. "In general, this means you're getting this sort of tax-exemption kind of for free, so it's even more valuable when the yields are above treasury yields." She also attributes a lot of the recent volatility to an excess amount of supply (there have been a great deal of issuances in recent weeks.)

Investors can buy individual muni bonds, state-specific bond funds, or national muni bond funds, which hold bonds from throughout the country. The more diversified your holdings, the less vulnerable you are to a hiccup in a single bond or single area of the country, Sjoblom says.

With that in mind, here are U.S. News's best intermediate municipal bond funds for the long term (these funds are generally free from federal taxes and come with average durations of 4.5 to seven years.)

[See How to Play It Safe With Muni Bonds.]

American Century Intemediate-Term Tax-Free Bond (symbol TWTIX). Manager Steve Permut generally sticks to high-quality bonds. But currently, the fund holds some lower-quality issues because he believes they're undervalued. Permut's fairly conservative strategy has translated into steady performance over time. The fund generally doesn't lead in the rallies or lag in the downturns. Over the past 10 years, the fund has returned an annualized 5 percent. It yields 2.2 percent and charges annual fees of only 0.48 percent.

Marshall Intermediate Tax-Free (MITFX). This fund differentiated itself from the pack in 2008 by finishing in positive territory while two-thirds of its peers lost money. Management is known for its cautious approach, and it recently diversified the fund into more holdings out of concern about credit trouble in the municipal bond market. Over the past 10 years, the fund has returned an annualized 5 percent. It yields 2.7 percent, and levies annual fees of 0.55 percent.

Invesco Tax-Free Intermediate (AITFX). Management sticks to high-quality bonds. "What we're trying to do is complement riskier investments that other people have," says co-manager Richard Berry. He aims to keep the fund's average duration below the average of its peer group, which makes the fund less vulnerable to interest-rate hikes. The fund has returned an annualized 5 percent over the past 10 years. It yields 1.9 percent and charges annual fees of 0.38 percent.