NEW YORK (TheStreet) -- At a time when investors have been pouring money into municipal funds, Vanguard Group and Fidelity Investments have been recording strong sales. Of the $56 billion that flowed into municipal funds so far this year, $13 billion went to Vanguard, and Fidelity collected $4 billion, according to Morningstar.

While the two companies have long been dominant players in municipals, they have special appeal these days. During the turmoil that swept municipal markets in 2008, funds from both firms proved relatively resilient.

Which company should you favor? That's hard to decide. Both fund families follow conservative strategies, and they have delivered good long-term returns. In the end, some investors may prefer Fidelity, which has recorded slightly higher returns. Vanguard should appeal to tight-fisted shareholders, since the company famously charges rock-bottom expense ratios.

The most important ingredient in Vanguard's success is its low fees. While fees are a crucial factor for all funds, low costs are especially important for municipals because the annual returns are typically low. Consider Vanguard Long-Term Tax-Exempt. During the past 10 years, the fund returned 5.5% annually, outdoing 94% of competitors and beating the category average by 0.85 percentage point. Much of the margin of victory can be traced to fees. Vanguard charges an annual expense ratio of 0.15%, compared with 1.02% for the average long-term municipal fund.

Funds that charge high expenses labor under a handicap. Fees are directly subtracted from yields and returns. To overcome the hurdle, some portfolio managers take on more risk. Many funds buy lower-quality bonds, hoping that their extra yields will compensate for greater expenses.

Because of its low fees, Vanguard feels no such pressure to take on risk. Vanguard portfolio managers can buy high-quality bonds and be confident the funds will deliver competitive results. Focusing on rock-solid bonds, Vanguard survived the downturn with minimal damage.

Make no mistake, the Vanguard portfolios aren't index funds that simply buy and hold high-quality bonds. The managers attempt to outperform. But the funds only make limited bets.

Sometimes the Vanguard managers make duration plays. Duration is a measure of a security's sensitivity to interest rates. Vanguard Long-Term Tax-Exempt typically has a duration of around 7.5 years. The managers adjust that figure, raising or lowering duration by half a year or so. That's a very limited range compared to some other bond funds that may change duration by several years.

During periods when interest rates seem likely to fall, Vanguard managers emphasize bonds with longer durations. The long bonds produce larger capital gains when interest rates fall and share prices rise.

Vanguard managers made a small move recently, increasing duration by about half a year. The shift helped boost returns slightly. "As municipals rallied this year, long-duration bonds did well," says Christopher Alwine, the head of Vanguard's municipal group.

Though it charges a bit more than Vanguard, Fidelity has typically outperformed in up and down markets. For example, Fidelity Intermediate Municipal income has an expense ratio of 0.38%, compared with 0.15% for Vanguard Intermediate-Term Tax-Exempt. During the past 10 years, Fidelity Intermediate returned 5.2% annually, beating 86% of competitors and exceeding Vanguard Intermediate-Term by 0.3 percentage point. In the downturn of 2008, the Fidelity fund returned 1%, beating its Vanguard competitor by a percentage point.

Fidelity has succeeded this year partly by holding lower average credit qualities. While Vanguard Limited-Term Tax-Exempt has an average credit quality of AA, Fidelity Short-Intermediate Municipal Income has a credit quality of A. After suffering big losses in 2008, the lower-quality bonds recovered sharply this year and helped Fidelity surpass Vanguard.

Like Vanguard, Fidelity only makes small bets. An effective one began in 2006 and 2007. At the time, the economy was booming. Paying little attention to default risk, confident investors bid up prices of lower-quality bonds. Cautious Fidelity managers began buying AA-rated bonds and shifting away from issues rated BBB, the lowest rating in the investment-grade category. "The prices on the lower-quality bonds did not make any sense," says Jamie Pagliocco, a manager of Fidelity Municipal Income, a long-term fund.

By the time markets sank in 2008, Fidelity had overweighted very high-quality bonds. Those stayed afloat during the downturn, helping Fidelity to beat competitors.

Despite deft trading, the Fidelity and Vanguard funds don't lead the pack every year. In recent months, bonds rated below-investment grade have been outpacing investment-grade issues owned by Fidelity and Vanguard. That has caused the two leading companies to lag some competitors. But over the long term, the cautious strategies of Fidelity and Vanguard should pay dividends, delivering winning results while taking minimal risks.

-- Reported by Stan Luxenberg in New York.