High yield bond funds have been considered in some circles to be a diverse investment vehicle with the conservativism of the bond market, and the growth potential of stock. However, nothing can be further from the truth.
High-yield bond funds are prospectively corresponding with the current stock market conditions of late. High-yield bond funds are unique in the bond world itself. Generally, the bond market performs inversely to the stock market. When stocks are up, bonds are down, and vice-versa. However, in the recessive economy of the past few years, that general notion has been severely tested.
High-yield funds consist of a portfolio of several corporate bonds. The majority of the corporate bonds found within a high-yield fund tend to be rated below BB. In the bond world anything rated BB or below are considered junk bonds. This means that there is a high risk that a bond rating BB or below has inherent risk of default. This means that the principle amount of money that investor places into a junk bond, may be lost because the corporation cannot meet its debt obligation. However, with any type of risk comes the potential for a great deal of reward. High-yield bond funds consist of junk bonds with huge growth potential. The interest rates and increased bond prices can result in fantastic returns if you choose wisely.
High-yield funds are essentially mutual funds that invest in corporate bonds with good growth potential. Mutual funds themselves are open-ended investments that pool the monies from all of its investors together. The cost of all of the corporate bonds held in a high-yield fund is disseminated among the myriad of investors. This average along with the value of the protfolio itself becomes the share price of the fund, which is known as the Net Asset Value (NAV). The NAV plus a specified percentage of the fund Management fees are what the investor pays per share. Shares can be bought and sold by investors at any time, but are sold at the NAV.
High-yield bond funds are generally managed by a team of experts that have extensive experience working in the corporate bond market. These highly educated money managers buy and sell corporate bonds almost daily. The amount of this buying and selling process is called turnover. Turnover equating to 100% simply means that the management team has bought and sold virtually every bond issue during the course of the year. A high turnover resulting in profits can be a tax burden on a high-yield bond fund investor.
High-yield bond funds are just as speculative as some stocks may be but you rarely hear about them on the financial news. Though there are times when high-yield bond funds enjoy high returns that are comparable to stock market returns during a bull run, they are not any safer. With the intensely variable stock market conditions of today’s fluctuating market, great care must be taken when deciding whether or not to invest in a high-yield bond fund.