After a dream run in 2015, high-yield municipal bond mutual funds or high-yield muni bond mutual funds continue to impress this year. Among the muni bond fund categories, the high-yield ones emerged as the top performers in the first quarter, according to Morningstar. These funds – considered one of the safest choices in deriving tax-exempted returns – boast a return of 1.8% this quarter. Mutual funds from this category returned 4.28% last year.

In this scenario, it will be interesting to find the top-performing mutual funds with strong fundamentals from this sector that are still good investment options. Before going into the details of these funds, let's have a look at the key factors that gave them a boost in the first quarter.

Factors Boosting High-Yield Muni Bond Funds

The tax-free income appeal of high-yield muni bond mutual funds played a major role in drawing the attention of risk-averse investors in the first quarter. Exemptions from federal tax and in many cases from state taxes as well, and the potential to provide higher yields than funds from other muni bond categories, helped these to fetch healthy returns and see consistent inflows.

According to Lipper, investors pumped in $273 million of assets in funds from this category in the week ending March 23. This was preceded by an inflow of $229.6 million registered a week earlier. Separately, the U.S. based municipal bond funds posted a net inflow of $901.5 million for the week ending March 23, in addition to $780 million of inflows registered the earlier week.

Moreover, dismal performances by equity markets in the first half of the quarter amid China-led global growth worries and the slump in oil prices forced investors to pull out their money from stocks and invest in comparatively safer assets. This also had a positive impact on the performance of high-yield muni bond mutual funds. Although equity markets recovered significantly in the latter half of the quarter, investors continued to invest notable portions of their assets in these funds.