Corporate Bond Risk – How To Evaluate Corporate Bond Funds?
Investors get quite a few options for investing in bond funds. Many prefer to invest in government bond funds for the benefits they offer while others fancy corporate bond funds. Novice investors may find it difficult to comprehend the different characteristics of corporate bonds in particular, and thus decide the ones that best answer their investment objectives. You need to adhere to certain fundamentals of investing for making the most appropriate investment. Here are some important aspects that you should not overlook while making investments:
1. At the outset you should be clear of your objectives of investing. Unless you decide your objects, you can’t really evaluate a fund. If you intend getting the maximum income, you should probably invest in high yield bond funds or junk funds as they are popularly called. In such cases your funds are invested in high risk bonds which are naturally expected to pay higher yield. Your risk taking capacity and the tax bracket to which you fall also needs consideration while selecting bond funds. Also, do not lose sight of how a particular bond will affect you overall portfolio while evaluating a bond fund.
2. Examine fund expenses. Every mutual fund has operational expenses that are listed in its prospectus as expense ratio. At times it may be worthwhile opting for funds with higher expense ratio, as in the case of an actively traded international fund having high performance, but most often you should look for funds having minimum expenses. You should appreciate that expense ratio has a direct bearing on your profits. The more is the expense ratio, the less are your earnings. You should also check if you are liable to paying any fees for selling or buying your preferred fund.
3. It is legally obligatory for fund operators to pay all capital gains to shareholders, and the latter must declare such gains in their taxes. Now, the problem is that funds distribute such gains once a year. So, depending on which part of the year you bought fund, you may become liable to pay huge unexpected tax. Though it implies that you won’t have to pay tax in future while selling your fund, you have to make arrangements for paying taxes for the current year and that could largely change the amount of payable tax and your financial plans.
4. Take time to study the prospectus of the fund to know all the necessary details about the fund. You’ll know who are the managers, what are the chargeable expenses of the fund and what kind of purchases the fund is permitted to make. Many funds are misnomers of the funds they invest in. Many investors realized that some high quality corporate bonds had invested nearly thirty percent of their resources in speculative violent bonds! Look into the bonds that the intended funds possess and also the bonds that it is permitted to buy to ensure that these are as per your investment objectives.