Sep 28 2017

CL King Tips for Investing in High Yield Bond Mutual Funds

High yield bond mutual funds are gaining importance these days due to their ability to offer attractive returns and strong diversification benefits. The investment case is also supported by the fact that many investors have suffered huge losses by direct stock investing while these mutual funds have generated equity-like returns with relatively lower volatility.

 

Although, the name suggests that it primarily invests in bonds rated below investment grade (a.k.a junk bonds), the portfolio risk is minimized because these funds hold a wide range of such securities. Moreover, high yield mutual funds provide better returns than most other conventional bond mutual funds. One other important investment consideration is the lower susceptibility of these funds to interest rate fluctuations compared to investment grade securities, as the former has higher yields compared to the latter. Simply put, prices of high yield bond funds tend to be more sensitive to changes in their issuers’ financial outlooks than to changes in interest rates and therefore can act as a natural hedge against interest rate risk.

 

Generally, high yield bond mutual fund offers returns equivalent to direct stock investment. These mutual funds are managed by experienced fund managers who have a vast experience in the capital markets. If mutual fund investments are done for a longer term basis, one can get exceptional returns, far more than what can be obtained by just keeping money in the bank.

 

Investors can invest in a variety of high yield bond funds that are available in the market. Some of the common themes of investments include – 1) high risk – high – return 2) low risk – low return, and 3) the medium risk – medium return. Interestingly, even low risk – low return funds have potential to general substantial return on investments. On the other hand, the main disadvantage of these investments is that lower interest rates do not always result in higher prices of the HY bonds.

 

Basic steps to follow

 

Although, investing in high yield bond mutual funds is not very common with individual investors, the steps that need to be followed while investing do not differ much compared to the traditional mutual fund investing.

 

Investors need to go to the office of the mutual fund provider and meet with investment managers. The manager typically explains the advantages and disadvantages of every fund. Investors and managers can finalize the investment policy statement as per risk appetite and return objectives on investors.

 

The final stage is security selection. Investors can select a few funds and invest in a fund, which has a good reputation in the market and has given consistent returns to investors over a time.

 

One important consideration for investors is to remember that these investments are affected by market risks. It is a common phenomenon that investors may see volatility in the investment value and might see negative returns on their investments in the near term. That said, as market conditions improve, these funds rise in value notably.

 

As an active fixed income underwriter, C.L. King co-manages the issuance of investment grade bonds, high yield bonds and $25 par value retail bonds and preferred. Our peer-leading capital base, proven fixed income sales and trading platform, and long-standing distribution capabilities into retail broker-dealers and mid-tier bond investors allows us to handle large underwriting commitments.

Also read: How This Infrastructure Bonds Vital to Investment Banking?

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