For individual investors seeking tax-advantaged investment strategies in the fixed income space, municipal bonds offer an attractive solution. Municipal bonds are debt securities issued by government entities that provide modest returns by way of interest payments over the duration of the bonds. The interest received on a municipal bond is generally exempt from federal tax, and in some cases, state and city tax as well. Individual investors have the ability to purchase municipal bonds individually through the entity issuing the security, or investors may utilize a pooled investment strategy such as a mutual fund to gain more exposure to multiple municipal bond issues.

While municipal bonds are attractive to investors in higher tax brackets, the securities carry a degree of risk. General obligation bonds, or those backed by the taxing power of the issuing entity, are considered to be safer investments than revenue bonds, or those used to fund specific projects. Because general obligation bonds expose investors to less risk, interest rates paid on these municipal bonds are lower than other debt securities. Revenue bonds have a greater risk of default over time, but they can provide a higher rate of return to investors who are willing to take on that risk. Investing in municipal bond funds allows investors to diversify among general obligation and revenue bonds with the potential for tax-exempt earnings. As interest rates are set to rise in the upcoming year, municipal bond funds are an even more attractive fixed-income option for conservative investors willing to take on the associated risk.

American High Income Municipal Bond Fund

The American High Income Municipal Bond Fund was established in 1994 for the purpose of providing investors with a high level of current income exempt from regular federal income tax. The fund's managers invest a substantial portion of the fund's $3.62 billion assets in municipal bond debt securities exempt from federal tax, with up to 50% of the portfolio invested in debt securities with a rating of BBB+ or below, or Baa1 or below. Currently, the mutual fund diversifies holdings across low and highly rated bond issues, with 5.80% of the portfolio in AAA-rated bonds, 4.1% of the portfolio in AA-rated bonds, 18.2% of the portfolio in A-rated bonds, and 30.3% of the portfolio in BBB-rated bonds.

As of November 2015, the American High Income Municipal Bond Fund has generated a 10-year annualized return of 4.6%. The mutual fund's expense ratio is slightly above average for the fund category at 0.68%, and investors are charged an upfront sales load of 3.75% when they purchase shares. A minimum investment of $250 is required for both qualified and non-qualified investment accounts.

Waddell & Reed Advisor Municipal High-Income Fund

The Waddell & Reed Advisor Municipal High-Income Fund has an inception date of January 1986. Since that time, it has provided exposure to the municipal bond market to individual investors. The mutual fund seeks to provide a high level of current income that is exempt from federal taxation by investing primarily in a diversified portfolio of municipal bonds. A substantial portion of the fund's $843 million in assets are invested in municipal bonds with maturities of 10 to 30 years, and the majority of those holdings are revenue bonds. Currently, the mutual fund does not hold any AAA-rated municipal bonds but is diversified among lower-rated bonds, including AA issues at 1.5% of the portfolio, A-rated bonds at 9.4%, BBB-rated bonds at 18.7% and BB-rated bonds at 6.3%.

As of November 2015, the Waddell & Reed Advisor Municipal High-Income Fund has generated a 10-year annualized return of 5% for investors. The mutual fund has an expense ratio of 0.93%, higher than comparable funds in the same category. Investors are assessed an up-front sales load of 4.25% at the time shares are purchased, although no deferred sales charge is imposed at redemption. An initial investment of $750 is required for qualified and non-qualified accounts.

Nuveen High Yield Municipal Bond Fund

The Nuveen High Yield Municipal Bond Fund was established in 1999 and seeks to provide investors with current income exempt from federal tax; capital appreciation is a secondary investment objective of the fund. Fund managers invest a minimum of 80% of the mutual fund's $10.94 billion in assets in municipal bonds that pay interest exempt from personal income tax on the federal level, with the majority of fund assets invested in long-term, lower-quality issues. The fund currently holds 3.85% of its portfolio in AAA-rated bonds, 13.37% of its portfolio in AA-rated bonds, 2.38% of its portfolio in A-rated bonds, 12.24% of its portfolio in BBB-rated bonds and 14.02% of its portfolio in BB-rated bonds.

The Nuveen High Yield Municipal Bond Fund has generated a 10-year annualized return of 3.7% for investors as of November 2015. The mutual fund has an expense ratio of 0.78%, slightly higher than the category average. An up-front sales load of 4.2% is charged for new purchases, although no deferred sales charge is imposed at the time of redemption. Investors are required to make an initial investment of $3,000 for qualified and non-qualified accounts.

Vanguard Intermediate-Term Tax-Exempt Fund

The Vanguard Intermediate-Term Tax-Exempt Fund has an inception date of 1977, making it one of the longest-standing municipal bond mutual funds on the market. The fund seeks to provide investors with current income that is exempt from federal personal income tax by investing a minimum of 75% of its $44.72 billion in assets in municipal bonds rated in the top three rating categories. As an intermediate municipal bond fund, it maintains a dollar-weighted average maturity of six to 12 years, but fund managers do not have specific limitations on the maturity of individual securities held within the fund. Holdings within the mutual fund consist of AAA-rated bonds at 20.95%, AA-rated bonds at 54.35% and A-rated bonds at 19.50%.

As of November 2015, the Vanguard Intermediate-Term Tax-Exempt Fund has generated a 10-year annualized return of 4.3% with an exceptionally low expense ratio of 0.2%. Investors are not charged an up-front or deferred sales load on share purchase or redemption, although an initial investment of $3,000 is required for new qualified and non-qualified accounts.

T. Rowe Price Maryland Tax-Free Bond Fund

The T. Rowe Price Maryland Tax-Free Bond Fund was established in 1987 and seeks to provide a high level of current income to fund investors. Fund managers invest a minimum of 80% of the fund's $2.06 billion assets in debt securities that are exempt from federal and Maryland state and local personal income taxes. Bond holdings range in duration but have an average maturity of 15.07 years. Debt securities within the fund are focused on higher-quality issues, with 15.49% of the portfolio invested in AAA-rated bonds, 31.54% of the portfolio invested in AA-rated bonds and 28.5% of the portfolio invested in A-rated bonds.

As of November 2015, the T. Rowe Price Maryland Tax-Free Bond Fund has generated a 10-year annualized return of 4.5% with an expense ratio of 0.45%. The mutual fund does not impose an upfront or a deferral sales charge to investors, although an initial investment of $2,500 is required for both qualified and non-qualified accounts.

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