Introduction to High Yield Mutual Funds and Money Market Funds
May 17 2012
The last five years have been less than kind to investors and savers seeking higher returns and high dividends. The weak American economy, Euro-crisis, and dependency of Asian manufacturers on failing consumption in the Western countries has led to very poor pickings. However, in 2012 things have been looking at as the stock market flirts with highs of 13,000 not seen since mid 2008. Check out our new section on high dividend mutual funds. We also give five notable top alternative energy mutual funds
We try to bring you information about the best performing, top mutual funds, high yield bond funds, and the best mutual funds, according to different metrics. First, we start with an explanation of our philosophy. The word "yield" is a general term in the world of finance meaning rate of return. The yield is the percent gain in value or income of a share of that fund for over some specified period of time. It is also known as the "performance" or sometimes the "historic rate of return".
For example, if a fund or any security has a value of $100 per share at the beginning of 2009, and then rises in value to $110 per share at the beginning of 2010, we would say that it had a 10% yield because it rose $10 from an initial value of $100 ($10/$100 = 10%).
The Five Categories
Broadly speaking there are five categories of high yield financial instruments that taps into different sectors of the financial world. We would like to write an article about this topic soon but just briefly go over some basics.
- High yield stock funds
- High yield bond funds
- High yield dividend funds
- High yield money market
- High yield bank account
The first two, stocks and bonds, are the equity and debt markets with the first being more volatile than the second except in cases of low-grade, risky instruments. The third is dividend funds, essentially profiting off regular issuance of dividends. Two very well-known companies that issued strong dividends of 2.9% and 4.1% last year in 2011 respectively were McDonalds and Pfizer. McDonalds is the well-known food conglomerate, and Pfizer is a large bio and pharmaceutical technology company. The fourth, money market accounts is featured on our website but we have so far omitted the last for now because it is not a standard instrument.
Our List
Please take at a look at our own list of first 25 of the top 100 high yield mutual funds. There's no shortage of information. Consider sources from the big players, such as CNN finance which publishes its own list of CNN high yield mutual funds, and a list from Investment News detailing their own selection of the best high yield mutual funds.
Yield And Risk In The Best Mutual Funds
Higher yields are better for investors because it makes them more money but are often associated with securities that have low credit ratings. Investors must balance yield against risk. The historic rate of return is usually calculated for time periods of year-to-date, one year, three year, and five year returns. Some funds also have ten year return rates. There is a limit to how far back in history one can go, as mutual funds have a birthdate known as the "date of inception" or "incept date". A mutual fund may do exceedingly well by having an excellent rate of return in one year (or over a few years), but the next year things may sour badly and the fund performs much worse.
What Affects Yields Of Top Mutual Funds And High Yield Bond Funds
One reason why the performance of a mutual fund can fluctuate so wildly is that the component stocks in general fluctuate in value. In a bad year, the portfolio (or the groups of stocks) may all perform poorly individually, which leads to overall poor performance also. Another reason is that the fund manager who is responsible for choosing the component stocks, when to buy and sell, may make a poor decision that results in lower yields. For high yield bond funds, there is a strong tendency for bonds to be correlated in response to external forces. For example, the Federal Bank's mandated bank lending rate affects the interest at which companies, cities and states borrow through issuing bonds. Another overlooked factor is that load funds have increased fees which eats into the yield whereas no load index funds have lower fees that affect an investor positively in the long run.
Identifying Strong Stock And Bond Funds
That being said, some investors will seek to maximize their revenue with high yield mutual funds by trying to identify strongly performing funds at the best companies. This is not unreasonable. The thinking is that despite the volatility and random nature of stocks, there may be certain combinations that prove winning over time or in a window of time. These combinations may be randomly derived or selected through the skill of the fund manager. At the very least, one should be able to filter out such high yield funds by looking at the strong performers. In other words, they are made of two groups: a subset of true, strong ones and a subset of ones that performed well due to chance. These funds will help diversify your portfolio risk profile.
Caveat Emptor
The investor should always be aware that historic rates of return and past best performing statistics are not predictive of the future. In fact, stronger yields indicate greater variance of returns and dividends. It's a generally accepted tenet that in order to achieve stratospheric gains, a fund must sacrifice stability at the cost of increasing risk. So while the chance for great gains is increased, the chance for great losses is correspondingly more likely.