Top 5 High Yield Mutual Funds (Feb. 2011)

For the average investor, high yield mutual funds are the best method to invest in bonds rated below investment grade, popularly known as junk bonds. This is because these funds hold a wide range of such securities, significantly reducing portfolio risk. In addition, these funds provide better returns than investments with higher ratings, including government and corporate bonds. Further, because the yield from such bonds is higher than investment grade securities, these investments are less susceptible to interest rate fluctuations.

Below we will share with you 5 top rated high yield mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future.

T. Rowe Price High-Yield (PRHYX) invests a large proportion of its assets in a wide range of high yield corporate bonds, preferred stocks and convertible securities. The average maturity range of the portfolio is between 5 to 10 years. The high yield mutual fund has a three year annualized return of 8.54%.

The high yield mutual fund has a minimum initial investment of $2,500 and an expense ratio of 0.76% compared to a category average of 1.20%.

Nuveen High Yield Bond A (NHYAX) seeks highest possible total return. The majority of the fund’s assets are utilized to purchase domestic and foreign corporate debt. These securities are typically of the high yield variety, rated below investment grade. This high yield mutual fund returned 17.21% over the last one year period.

Andrew John Stenwall is the fund manager and she has managed this high yield mutual fund since 2004.

Putnam High Yield A (PHIGX) invests heavily in securities rated below investment grade with maturity periods of three years or more. The fund may also utilize futures, options, warrants and swaps to minimize risk or to enhance portfolio returns. The high yield mutual fund has a five year annualized return of 8.74%.

The high yield mutual fund has a minimum initial investment of $500 and an expense ratio of 1.04% compared to a category average of 1.20%.

USAA High-Yield Opportunities (USHYX) seeks high current income with a secondary objective of capital appreciation. At least 80% of its assets are used to purchase high yield securities such as bonds, convertible securities and preferred stocks. The high yield mutual fund has a ten year annualized return of 8.04%.

As of October 2010, this high yield mutual fund held 481 issues, with 7.23% of its total assets invested in iShares iBoxx $ High Yield Corporate Bd.

Catalyst/SMH High Income A (HIIFX) invests primarily in high-yield corporate bonds, as well as in convertible and asset backed securities. It may invest heavily in securities rated below investment grade and those which have defaulted. The high yield mutual fund is non-diversified and returned 17.89% over the last one year period.

Dwayne A. Moyers is the fund manager and has managed this high yield mutual fund since 2008.

To view the Zacks Rank and past performance of all high yield mutual funds, then click here.

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