All you need to know about high-yield bond funds
Every investor is concerned about the risk and returns associated with an investment. You need to understand the features and the expected return on an investment before you make a decision.
There are a number of investment products in the market. Bonds are one of the debt investment products. They are highly preferred as a long-term investment. A high-yield bond is basically a high-return bond with a low credit rating. The credit rating of the bond is slightly lower than that of treasury or corporate bonds. High-yield bond funds pay a higher return on investment and have a high debt ratio.
Risks on high-yield bond funds
High yield bond funds are high on risk. The default rate on this investment is as high as 4% per year, and a lot of investors do not see a major change in the defaults in any year. The bonds are highly volatile as compared to any other area of the market. However, it does not mean that the bonds have not performed well. At the same time, it is important to keep in mind that they fall quickly when the market tumbles. Before you make an investment decision, you need to understand that the bonds carry a high rate of risk, and consider your risk appetite with regard to the same.
Returns on high-yield bond funds
The return on any kind of investment is a second major concern after risk. Over a long period of time, it has been noted that the performance of high-yield bond funds has not dampened. If you consider a 10-year period, the bonds have performed consistently well and better than all other segments of fixed income. The returns have been positive and the risk-reward trade-off has been excellent.
When investor confidence is high, the bonds perform much better. If you compare all the fixed-income investment products, you will notice that the high-yield bond funds have performed much better in the last decade. A year-on-year comparison will help you make a better decision with regard to the investment. If you already invest in exchange-traded funds and high-risk mutual funds, you need not worry about the risks associated with these bonds. If you have a high-risk appetite and are looking at the long-term, bond funds are ideal for your investment and will lead to a good diversification of your portfolio.