High yield bond mutual funds provide the best choice for those looking to invest in below investment-grade bonds, also known as junk bonds. Though bonds that are rated below investment grade are believed to be riskier than investment-grade bonds, a well-diversified portfolio of these securities reduce the risk of the portfolio. Thus mutual funds maintaining a portfolio of these securities are the best for investors as these allocate their assets in such securities from a wide range of sectors.
Moreover, these funds are expected to provide better returns than those investing in securities with higher ratings, including government and corporate bonds. Also, due to their higher yield feature, junk bonds are believed to be less susceptible to interest rate fluctuations.
Below we share with you four top-rated high-yield bond mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future.
USAA High Income (MUTF:USHYX) seeks to provide total return through current income and capital growth. It focuses on investing in dollar-denominated non-investment-grade debt securities. Along with domestic securities, it may also invest without limit in dollar-denominated foreign securities. This high yield mutual fund returned 17.2% over the last one-year period.
Julianne Bass is the fund manager of USHYX since 2007.
Prudential High-Yield A (MUTF:PBHAX) invests a bulk of its assets in a diversified portfolio of high-yield bonds that are rated BB or lower by S&P or Ba or lower by Moody's. PBHAX seeks appreciation of income and capital by focusing on junk bonds. Prudential High-Yield A returned 14.6% over the past one year.
PBHAX has an expense ratio of 0.82% as compared to the category average of 1.06%.
Franklin High Income A (MUTF:FHAIX) seeks high current income with growth of capital as its secondary objective. FHAIX invests primarily in high yield securities that are rated below investment grade. The fund invests in debt securities including bonds, notes and debentures. FHAIX may also invest all of its assets in junk bonds. Franklin High Income A returned 18.7% over the last one-year period.
As of September 2016, FHAIX held 283 issues, with 1.10% of its assets invested in Citigroup FRN.
MainStay High Yield Corporate Bond Investor (MUTF:MHHIX) invests the majority of its assets in high-yield corporate bonds issued by both U.S. and non-U.S. companies. MHHIX focuses on investing in those corporate debt securities that are ranked lower than investment grade. The fund also invests nearly one-fifth of its assets in equity securities of companies. MainStay High Yield Corporate Bond Investor returned 14.2% over the past one year.
MHHIX has an expense ratio of 1.02% as compared to the category average of 1.06%.