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Despite expectation of the Fed to increase interest rates next month, which would in theory diminish the appeal of existing fixed-income, at least one stripe of the bond market should see increased investor interest, according to market observers.

Muni bonds will become more enticing because of changes in the tax laws. The new rules limit deductions on state and local taxes to $10,000, so the appeal of any investment that generates income exempt from state and local taxes should increase, says Greg McBride, chief financial analyst at website Bankrate.

Christine Benz, director of personal finance at Morningstar, added that the triple-tax benefit of munis would still apply if the investor lives in the same state and municipality as the bond issuer. And while there are single-state muni funds, other broader funds are spread across multiple municipalities so fund investors might not get that full benefit.

That said, she said “that the benefits of a mutual fund strongly outweigh the disadvantages for smaller investors, in large part because smaller investors transacting in individual munis can confront steep bid/ask spreads; it can also be tricky for them to research and adequately diversify the risk,” she said in an email.

Scroll through to see the 20 top-performing muni bond funds over the past five years. Only funds with at least $100 million in assets were included. We also show year-to-date returns, assets and, as usual, expense ratios for each fund. All data from Morningstar Direct


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