Over the last few months, investors’ interest has evidently shifted from equity funds to taxable bond funds. Taxable bond funds registered their 12th consecutive week of inflows last week, according to the latest Lipper’s fund flow report. Additionally, data from the Investment Company Institute (ICI) for the week ended May 31 showed that taxable bond funds have seen no outflows this year.

Taxable bond funds are debt securities whose interest income is taxable at state or federal levels. Funds from this category have higher risks as well as better yields than government bond funds. Hence, investing in taxable bond funds might be a wise investment option for bond fund investors willing to take on relatively higher additional risk in search of higher returns.

Taxable Bond Funds Register Stable Inflows

As per the latest Lipper weekly fund flow report, equity-based funds witnessed strong outflows last week, whereas taxable bond funds caught investors’ imagination. According to Lipper, taxable bond funds registered net inflows of $7.3 billion for the week ended June 7, preceded by an inflow of $1.4 billion the week before. Additionally, ICI reported that taxable bond funds witnessed estimated inflows of $1.77 billion for the week ended May 31.

Moreover, President Trump’s confused approach continues to weigh on the equity market. In Britain, the inability of Prime Minister Theresa May’s Conservative party to secure a majority in the general election added to investors’ woes. Also, in its meeting last week, the European Central Bank (ECB) held interest rates at 0.0% and ruled out possibilities of additional rate cuts. Given such dissuading events, investors may prefer bond funds over equity funds.

Why Buy Taxable Bond Funds?

Taxable bonds are fixed-income securities issued by the country or state, whose income is not tax-exempt. These kinds of bonds are used to fund a particular project or facility. Taxable bond funds are likely to yield better results banking on improving manufacturing activity and continuing job creation. So, mutual funds with strong exposure to various taxable bonds are considered prudent investment options in an environment of steadily rising GDP.

According to Morningstar, all the categories of taxable bond funds have generated encouraging year-to-date (YTD) and three-month returns. Emerging markets’ bond funds have returned 10% and 6.1% over the YTD and three-month time frame, respectively. Also, long-term bond funds have registered YTD and three-month returns of a respective 5.3% and 5.7%. Further, long-term government funds managed to register YTD and three-month returns of 5.1% and 6.5%, respectively.

Buy These 5 Taxable Bond Mutual Funds

This encouraging domestic backdrop calls for investors to focus their attention on five taxable bond mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) and have encouraging yields. Moreover, these funds have impressive YTD and three-month returns. They also have 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.

MassMutual Premier High Yield Service (DLHYX Quick QuoteDLHYX - Free Report) invests the lion’s share of its assets in high yielding fixed income producing securities that are unrated or are rated below investment grade. DLHYX invests in securities that are rated lower than Baa3 and BBB- by Moody's and Standard & Poor's, respectively.

DLHYX has an annual expense ratio of 0.75%, lower than the category average of 0.96%. The fund has YTD and three-month returns of 5.6% and 3.3%, respectively. Annual dividend yield of the fund is 5.6%.

Fidelity New Markets Income (FNMIX Quick QuoteFNMIX - Free Report) invests the majority of its assets in debt securities of issuers in emerging markets and other investments that are tied economically to these markets. FNMIX seeks growth of income and capital.

FNMIX has an annual expense ratio of 0.83%, lower than the category average of 1.18%. The fund has YTD and three-month returns of 7.3% and 4.6%, respectively. Annual dividend yield of the fund is 5.2%.

Lord Abbett Income F (LAUFX Quick QuoteLAUFX - Free Report) seeks maximization of income as well as preservation of capital. LAUFX invests more than 65% of its assets in investment grade bonds or fixed income securities, including mortgage-backed and asset-backed securities.

LAUFX has an annual expense ratio of 0.68%, lower than the category average of 0.70%. The fund has YTD and three-month returns of 4.2% and 3.5%, respectively. Annual dividend yield of the fund is 3.2%.

USAA High Income (USHYX Quick QuoteUSHYX - Free Report) aims 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, USHYX may also invest without limit in dollar-denominated foreign securities.

USHYX has an annual expense ratio of 0.82%, lower than the category average of 0.96%. The fund has YTD and three-month returns of 4.5% and 2.6%, respectively. Annual dividend yield of the fund is 5.3%.

Fidelity Advisor Emerging Markets Income A invests a major portion of its assets in debt securities of companies based in emerging markets and other investments that are linked economically to these markets. This non-diversified fund seeks appreciation of income and capital.

FMKAX has an annual expense ratio of 1.13%, lower than the category average of 1.18%. The fund has YTD and three-month returns of 7.1% and 4.4%, respectively. Annual dividend yield of the fund is 4.8%.

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