Corporate Bonds Funds

By: EconomyWatch Content   Date: 27 October 2009

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If you are willing to take some risk and do some research, corporate bonds funds can offer recurring income. Many investors think that investing in corporate bonds is a low-risk, low-yield proposition. However, corporate bond funds can be risky at times. You can avoid the risks by investing in professionally managed corporate bond funds. 

Significance of Corporate Bonds Funds

Usually corporate bonds funds choose bonds based on ratings and market sectors. Public bonds are rated on a scale from AAA to CCC. AAA corporate funds are of investment grade that can be compared to US Treasury bonds. CCC rated bonds or junk bonds offer higher yield, but involve a high risk of default (when the issuer of the bond fails to make payments). Corporate bonds are classified into two major groups, namely short term bonds and long term bonds. Long term bonds offer higher yield and carry higher risks.

Corporate Bonds Funds - Considerations

•    You should compare corporate bonds based on projected returns and the fees involved.
•    Taxes on corporate bonds are higher than those on US Treasury bonds.
•    The values of these bonds can decline if the issuer enters into default or partial default conditions.
•    When you are investing in a bond fund, it is better to do enough research on individual bonds that comprise the fund.

•    When a bond is investment grade, it does not mean that the bond will retain its grade through the maturity period.
 

Corporate Bonds Funds - High Yield Junk Bonds

If the corporate bond funds you are going to invest in are termed as “high-yield,” you should be very careful. Highly risky junk bonds that have a rating of BBB or lower can offer high returns in a strong economic environment. However, investing in this sort of corporate bond funds can become very dangerous in bear markets.

Despite the risks that corporate bonds funds carry, they offer higher liquidity than investing in individual bonds. You can exit positions when you find you are undergoing losses. In case of a substantial drop in value, you can put a stop-loss order any time on your corporate bonds to protect your investments. Corporate bond funds let you enjoy the stability and good returns of bonds without taking much risk, as long as you keep a keen eye on your positions.

 

 


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