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With the municipal bond market recovering from a pounding earlier this year, individual investors have started to put money back into mutual funds that hold roughly $250 billion in tax-free bonds, according to data gathered for Money magazine's Small Investor Index.

Municipal bond fund share prices fell an average of 5.3 percent from Jan. 1 to April 5 as interest rates rose. Since rates peaked in early April, however, muni fund prices have jumped an average of 4.5 percent to recoup much of the losses.The gains have drawn investors back to muni funds, which now yield an average of 5.5 percent, equivalent to a taxable 7.6 percent for someone in the 28 percent federal tax bracket. Six large mutual fund companies surveyed by Money report that their muni bond funds have had either net inflows or sharply slower redemptions this month.

For instance, the Kemper Municipal Bond Fund, with $4 billion in assets and a 5.2 percent yield, has taken in $17 million in June after suffering redemptions of $24 million in May. The $2 billion Fidelity High-Yield Municipal Bond Fund, yielding 6 percent, has received $8.4 million, after a $14.7 million outflow in May.

Many analysts, including Ralph Norton, editor of the Bond Fund Advisor in Ashland, Mass., believe this is a good time to get back into the muni market. Norton cites a slowdown in new issues and increased demand from investors who "have seen how much their taxes are going up under the new tax law."

Last week, the Money Small Investor Index, which tracks the typical individual's holdings, rose $241 to $45,957. Stocks gained $166, while bonds added $55. CDs and money funds kicked in $8, and gold rose $8.