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Investors are evidently focused more on taxable bond funds than equity funds this year. As per the latest ICI and Lipper weekly fund flow report, equity-based funds continued to witness outflows, whereas taxable bond funds were still fancied by investors. In fact, taxable bond funds registered strong inflows for 38 straight weeks, as per data from the Investment Company Institute (ICI) for the week ended Aug 23.

Taxable bond funds are debt securities with taxable interest income at state or federal levels. Funds from this category offer better yields than government bond funds and have lower risks than high-yield bond funds. In this context, investing in taxable bond funds might be wise for those willing to take on relatively more risk in search of higher returns.

Taxable Bond Funds Register Record Weekly Inflows

According to ICI, taxable bond funds registered net inflows of $2.486 billion for the week ended Aug 23, preceded by a weekly inflow of $3.365 billion. Meanwhile, domestic equity mutual funds managed to curtail some recent declines, but posted weekly outflows of $2.73 billion.

Additionally, Lipper reported that taxable bond funds witnessed estimated inflows of $2.1 billion for the week ended Aug 30, bringing the rate of inflows to more than $1.8 billion/week for this $2.5 trillion sector. Out of the total weekly inflows, $323 million was invested in taxable bond mutual funds.

Why Buy Taxable Bond Funds?

Taxable bonds are fixed-income securities issued by the country or state. As the name suggest, the income from these bonds are not tax-exempt. These are used to fund a particular project or facility. Taxable bond funds are likely to yield better results banking on improving manufacturing activity and stable economic growth. So, mutual funds with strong exposure to various taxable bonds are considered prudent investment options in an environment of steadily rising GDP. (Read More: Q2 GDP Best in More Than 2 Years: 5 Growth Funds to Buy)

According to Morningstar, all the categories of taxable bond funds have generated encouraging year-to-date (YTD) and three-month returns. Emerging markets local-currency bond funds have returned 13.8% and 4.1% over the YTD and three-month time frame, respectively. Also, long-term bond funds have registered YTD and three-month returns of respectively 8.7% and 3%. Further, long-term government funds managed YTD and three-month returns of 9.2% and 3.6%, respectively.

Buy These 5 Taxable Bond Mutual Funds

This encouraging backdrop calls for focus on five taxable bond mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy) and have encouraging yields. Moreover, these funds have impressive YTD returns, minimum initial investment within $5000 and low expense ratios.

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.

PIMCO Emerging Local Bond P (PELPX - Free Report) seeks high level of returns consistent with preservation of capital. PELPX invests a bulk of its assets in fixed income instruments, which are denominated in currencies of with emerging market countries.

PELPX has an annual expense ratio of 1.00%, lower than the category average of 1.26%. The fund has YTD returns of 15.4%. Annual dividend yield of the fund is 4.3%.It has a Zacks Mutual Fund Rank #2.

Eaton Vance Emerging Markets Local Income A (EEIAX - Free Report) seeks maximization of return. EEIAX invests the majority of its assets in fixed income securities issued by emerging markets countries or denominated in currencies of emerging market countries.

EEIAX has an annual expense ratio of 1.25%, lower than the category average of 1.26%. The fund has YTD returns of 15.6%. Annual dividend yield of the fund is 8.4%.It has a Zacks Mutual Fund Rank #1.

Vanguard Long-Term Treasury Investor (VUSTX - Free Report) seeks growth of income over the long run. VUSTX invests a major portion of its assets in U.S. Treasury securities such as bills, bonds and notes. The fund’s dollar-weighted average maturity is believed to vary between 15 years and 30 years.

VUSTX has an annual expense ratio of 0.20%, lower than the category average of 0.50%. The fund has YTD returns of 7.7%. Annual dividend yield of the fund is 2.6%.VUSTX sports a Zacks Mutual Fund Rank #1.

Vanguard Long-Term Investment-Grade Investor (VWESX - Free Report) seeks appreciation of income and invests the majority of its assets in intermediate- and long-term investment-grade securities. The fund’s dollar-weighted average maturity is believed to vary by 5 years around the maturity period of its benchmark index.

VWESX has an annual expense ratio of 0.22%, lower than the category average of 0.77%. The fund has YTD returns of 8.2%. Annual dividend yield of the fund is 3.9%.It has a Zacks Mutual Fund Rank #1.

Oppenheimer Limited-Term Bond Fund Class Y (OUSYX - Free Report) invests the lion's share of its assets in debt securities issued by both the U.S. government and corporate entities. OUSYX may invest not more than 35% of its assets in securities that are rated below investment grade.

OUSYX has an annual expense ratio of 0.63%, lower than the category average of 0.75%. The fund has YTD returns of 2.2%. Annual dividend yield of the fund is 2.4%.It has a Zacks Mutual Fund Rank #1.

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