Back to top

Image: Bigstock

Investment-Grade Bond Funds Attracting Attentions: 4 Choices

Read MoreHide Full Article

While investors continue to evade U.S. based equity funds, other riskier assets that include funds investing in junk bonds are also seeing significant withdrawals. The latest data showed that investors are withdrawing chunks of their assets from riskier funds to reallocate the same in less risky options including investment-grade bond funds.

Moreover, lower yield on government debt securities is also playing a major role in boosting demand for investment-grade bond funds. So, investment-grade bond mutual funds that also provide favorable yields may now prove to be profitable additions to one’s portfolio.

Withdrawals from Risky Funds, Inflows in Safer Options   

According to Lipper, U.S.-based equity funds witnessed withdrawals of $3.6 billion for the week ending Aug 3. The declining oil market, which entered a bear territory recently, played a major role in boosting withdrawals from equity funds. Equity funds investing in securities from the energy sector saw outflows of $470 million during the week, the most since last December. Moreover, funds that focus on acquiring junk bonds also witnessed highest outflows since December. These riskier funds registered withdrawals of $2.5 billion in the week, the Lipper data showed.

However, less risky funds attracted significant investor attention during the week. Precious metals funds – a safer option in equity space –attracted $838 million, Lipper said. Also, funds investing in investment-grade debt securities saw inflows of $2.5 billion, witnessing inflows for the fifth-consecutive week. Also, money market funds posted inflows of $3.8 billion. Meanwhile, emerging market securities funds continue to gain investor attention. While emerging bond funds witnessed inflows of $613 million, stock funds attracted $1.8 billion of net inflows, according to Lipper.

Why Intermediate Investment-Grade Bond Funds?

In a scenario when riskier assets such as equity and junk bond funds are registering strong outflows, investment-grade bond funds are consistently performing well in terms of inflows. Investment-grade bond funds are best known for its stability. They have potential for offering safer returns than those investing in junk bonds and are thus considered as one of the best investment options in a highly volatile environment. Also, they are more attractive than government bond funds in terms of yields especially in an environment when trillions of government bonds are offering negative yields throughout the globe.

Separately, intermediate-term funds are usually safer options for investors, when compared to small-term funds. Fixed income securities having average maturity period between 3 and 10 years are classified as intermediate securities. Also, they are poised to provide higher returns than long-term bond funds. Banking on this encouraging environment, intermediate investment-grade bond mutual funds are poised to provide safer and steady returns. 

4 Intermediate Investment-Grade Bond Funds to Buy

We have highlighted four intermediate investment-grade bond mutual funds that either carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

These funds have encouraging year-to-date, one-year and three-year annualized returns. The minimum initial investment is within $5000. Also, these funds have favorable expense ratios and no sales loads.

Vanguard Intermediate-Term Investment-Grade Investor (VFICX - Free Report) invests the majority of its assets in fixed-income securities rated investment grade. VFICX has year-to-date, one-year and three-year annualized returns of 6.6%, 6.8% and 4.9%, respectively. It has an expense ratio of 0.20%, lower than the category average of 0.72%. This Zacks Mutual Fund Rank #1 product has an annual dividend yield of 2.8%.

MFS Corporate Bond R4 (MFBJX - Free Report) invests the lion’s share of its assets in high quality debt securities issued by corporate bodies. MFBJX has year-to-date, one-year and three-year annualized returns of 8.2%, 7.3% and 5.2%, respectively. It has an expense ratio of 0.57%, lower than the category average of 0.72%. This Zacks Mutual Fund Rank #1 product has an annual dividend yield of 3.3%.

Fidelity Corporate Bond (FCBFX - Free Report) seeks to maintain overall interest rate risk identical to the Barclays U.S. Credit Bond Index by investing a large chunk of its assets in debt securities that are rated investment grade. FCBFX has year-to-date, one-year and three-year annualized returns of 8.2%, 6.7% and 5.3%, respectively. It has an expense ratio of 0.45%, lower than the category average of 0.72%. This Zacks Mutual Fund Rank #2 product has an annual dividend yield of 3.1%.

Columbia Corporate Income Z (SRINX - Free Report) invests the majority of its assets in investment grade debt securities, which also include foreign securities. It seeks to maintain an average effective duration of 3-10 years. SRINX has year-to-date, one-year and three-year annualized returns of 9.5%, 7.1% and 4.4%, respectively. It has an expense ratio of 0.70%, lower than the category average of 0.72%. This Zacks Mutual Fund Rank #2 product has an annual dividend yield of 3.1%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at https://www.zacks.com/funds.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Published in