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Corporate bonds can be divided into two types: investment grade and junk (otherwise known as high yield securities), which is arguably the most important choice when determining a portfolio of corporate bonds. These two types of corporate bonds can be broken down further into short-, medium- or long-term and can be broad-based, domestic, foreign, or sector specific.
Junk bonds, those rated BBB- and lower, have a higher risk of default, but they pay higher yields than investment grade corporate bonds. Regardless of the type, corporate bond mutual funds allow for investors with smaller portfolios to gain exposure to this asset class, and can provide a well-diversified high yield corporate bond portfolio at a low cost.
Be sure to read our Beginner’s Guide to Bond Mutual Funds.
With an individual bond, risk decreases the longer you hold the security, but this is not true with corporate bond funds because the individual holdings are constantly maturing, being bought and sold. There are many different kinds of corporate bond funds with different risk/return profiles that can cater to a variety of different investor appetites.
See also our Beginner’s Guide to Municipal Bond Mutual Funds.
Furthermore, bond mutual funds never mature like a single corporate bond would; as corporate bonds mature within the portfolio they are replaced with others. Another benefit is that corporate bond mutual funds give you access to the expertise of a portfolio manager. With these benefits, investors looking to gain exposure to corporate bonds should at least consider a corporate bond mutual fund.
Be sure to see the 7 Essential Tax Tips for Mutual Fund Investors.
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