A High Yield Mutual Fund Can Complement a Well-Diversified Portfolio


High-yield mutual funds offer investors an effective combination of current income and potential capital appreciation. But investors must be wary of higher credit risk and more volatile share price performance.

Non-investment-grade debt, commonly called junk bonds, involves more significant principal or interest payment loss risks than investment-grade securities. This fund seeks to diversify its holdings through structural quality and issuer diversity.


High-yield mutual funds allow investors to increase earnings in exchange for taking on more risk. They are trendy among income seekers dissatisfied with the low returns offered by investment-grade corporate bonds and bank CDs. They provide higher yields while typically being less sensitive to fluctuations in interest rate environments.

Investors must exercise care when selecting the ideal bond fund for their portfolio. Yields differ among funds depending on their calculation methods, causing significant variations. One approach for comparison purposes would be the 30-Day SEC Yield which measures total distributions over 30 days to its net asset value – this figure can help investors quickly assess different bond funds’ returns.

An impressive 30-Day SEC Yield may signal a fund’s income-generating potential, but it is essential to understand its calculations. To achieve more excellent stability, yield calculations should ideally use the price of shares at the end of the calculation period instead of distributions over 12 months, which can experience broad directional shifts.

Sometimes a fund’s yield can decrease even though its earnings and assets remain unchanged, possibly signaling its risk exposure has been reduced by shifting into lower-grade securities or market price decline for its bonds. Any drastic movements in yield should prompt investors to examine why such fluctuations exist within their fund’s performance.

Muni bonds provide an alternative investment solution that offers investors who seek a steady source of high income without incurring credit risk – municipalities issue them and have income exempt from federal tax, making them suitable for use with taxable accounts such as IRAs and 401(k) plans.

For instance, Janus Henderson High Yield Fund Class N (JAHYX) stands out as an active high-yield mutual fund with moderately priced expenses that offers five-star performance and charges an expense ratio of 0.62% with a $1 million minimum investment requirement.

Credit Risk

High-yield mutual funds offer investors an alternative investment vehicle to diversify their portfolio by adding riskier investments. While these funds often provide higher yields than investment-grade corporate bonds, they carry greater credit risk, which means it may not be fully paid when debtors default on interest payments; such risks often go undetected by investors and can become magnified when the economy suffers an economic downturn or recession.

Investing through a diversified, professionally managed strategy is ideal for maximum benefits from high-yield mutual funds. Individual bonds or mutual or exchange-traded funds (ETFs) offer this flexibility, with former options offering greater risk diversification while experts assess each bond individually’s creditworthiness; latter types often offer lower expenses and more accessible liquidity than an individual bond investment option.

When selecting a high-yield mutual fund, the portfolio concentration must be kept to an absolute minimum. A higher concentration increases your risk since managers won’t be able to spread out bets effectively across your portfolio. Furthermore, your portfolio should feature securities from diverse credit ratings for maximum diversification.

When choosing one, consideration should also be given to a high-yield mutual fund’s maturity. As its assets remain longer, more exposure exists for interest rate risk exposure when rates rise, and bond prices decline as interest rate risk becomes evident.

Choose a high-yield fund with shorter maturity to reduce this risk. Such funds typically hold short and intermediate-term bonds less vulnerable to interest rate changes.

Janus Henderson High Yield Fund Class T (JAHYX; $8.63) is an ideal example of this strategy. With 253 different high-yield bonds comprising only 1.3% of its assets compared with an average 2.8% allocation in junk bonds for its benchmark index, its managers utilize both fundamental analysis and high conviction investing to identify potential outperformers that help JAHYX outshone the benchmark since 1995.


You can invest in high-yield bonds in various ways: individual investments or mutual funds and exchange-traded funds (ETFs). Both options provide diversification among numerous bonds while having professional investment managers evaluate them for creditworthiness; however, they also carry unique risks that should be carefully considered when investing.

Such funds may offer lower liquidity than more conventional bond funds, which could pose problems when selling investments quickly; you might not get a fair price for your bond and may need to sell at short notice. It would help to closely examine a fund’s liquidity metrics to avoid exposing yourself to too much risk.

Liquidity can be measured in several ways for mutual funds, including trading and average daily volumes. You should also assess if its holdings can meet your needs in case of market disruptions or natural disasters.

When it comes to high-yield mutual funds, you must pay particular attention to their liquidity. High-yield investments are generally less liquid than other bonds and may present higher default risks; additionally, their markets tend to be volatile, increasing your risk of loss.

Investing in an ETF with passive rules, like the iShares Core S&P US High Yield Bond ETF (HYG), is one way to circumvent liquidity risk. This index ETF targets only high-quality corporate junk bonds with liquid markets – though this limits potential growth potential, it reduces exposure.

An alternative approach would be to select an actively managed bond fund specializing in lower-yielding bonds with higher grades, like American Funds High Income Trust (AHTFX). It invests exclusively in BB and Baa junk bonds, helping reduce risk and volatility. However, CFRA believes this commitment to credit risk management limits the fund’s potential capital appreciation potential.


Individually purchased high-yield bonds carry risks. When investing in mutual or exchange-traded funds instead, however, your risk can be spread more evenly among a pool of bonds under the management of professional investment managers who assess the creditworthiness of securities in your portfolio. These managers might diversify it by holding different maturities and ratings of bonds in your portfolio, or they could have more concentrated positions of higher-risk junk bond issues offering greater yields.

When selecting a mutual fund as an investment option, make sure you read its primary documents, such as its prospectus and offering memorandum, which contains details about its bond issuer’s financial health, plans for using proceeds, terms and conditions and investment strategy of its manager as well as which bonds it holds in its portfolio.

This Fund seeks to generate high current income levels with capital appreciation as its secondary goal. To meet its objective, it invests primarily in debt securities rated below investment grade by major rating agencies and unrated or “junk bonds,” commonly referred to by industry professionals.

High-yield bond funds’ assets tend to be more volatile than the assets of general bond funds due to two primary factors: credit risk and interest rate sensitivity. Credit risk refers to the possibility that the issuer fails to fulfill payment obligations, while interest rate sensitivity relates to how its price might decrease when interest rates increase.

High-yield bond funds may also be more susceptible to price changes due to their investments in lower-rated bonds. They may face the additional threat of call risk during falling interest rates – when bond issuers could redeem early and sell it at lower prices than anticipated.

Unlike some high-yield mutual funds, this one doesn’t impose a front-end load or sales charge when you buy shares, meaning you can start investing with as little as $10,000 upfront.