Mutual fund investors are increasingly finding a safe haven in bond mutual funds. Especially since the beginning of this year, fund investors have shifted their attention from domestic equity mutual funds to taxable and municipal bond funds due to rising concerns over a slowdown in global economic growth. This is largely a result of the coronavirus outbreak in China, which continues to weigh on investors’ sentiment.
Bond Fund Inflows Rise in 2020
According to a Reuters report, bond funds brought in about $16.1 billion in new assets in the week ended Jan 25. Fund investors have put in as much as $57.8 billion into the mutual fund category since the beginning of this year.
Looking deeper into bond fund inflows, one can see that about $13 billion was invested in taxable bond funds whereas $3.1 billion was put into municipal bond funds. After all, bond funds are not only a safe haven for investors seeking protection against stock market volatility, but also offer diversification in low minimum initial investment.
In striking contrast to the impressive bond fund inflows since the beginning of 2020, investors have pulled $21.1 billion from U.S. equities (the broader S&P 500 has gained about 1.6 on a year-to-date basis), fearing turbulent market conditions ahead, given that the fast-spreading virus in China is taking a toll on U.S. benchmark indices as well.
2 Best Bond Funds to Buy
We have, therefore, selected two mutual funds that invest in investment-grade bonds and carry a Zacks Mutual Fund Rank #1 (Strong Buy). In addition, the minimum initial investment for these funds is within $5,000.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Putnam Fixed Income Absolute Return Fund Class A PTRNX aims for positive total return. The fund invests the majority of its assets in fixed-income securities. This means that the fund invests across global fixed-income sectors. The portfolio managers are flexible to lessen a variety of risks and are not limited by traditional benchmarks.
This Zacks sector – Investment Grade-Bonds: Misc has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
The Putnam Fixed Income Absolute Return Fund Class A, as of the last filing, allocates its assets in top two major groups — Fixed Income and other asset classes. Further, as of the last filing, Federal National Mortgage Association 3.5%, Federal National Mortgage Association 4% and Federal National Mortgage Association 3% were the top holdings for PTRNX.
PTRNX has an annual expense ratio of 0.80%, which is below the category average of 1.18%. It has returned 9% over a year. The fund has a minimum initial investment of $500.
Voya Investment Grade Credit Fund Class P IIGPX aims to increase total return. The fund invests the majority of its assets in investment-grade fixed-income securities. These investment-grade fixed-income securities are those rated at least BBB- by S&P Global (NYSE:SPGI) Ratings, or Baa3 by Moody's Investors Service, Inc., or BBB- by Fitch Ratings, or have an equivalent rating by a Nationally Recognized Statistical Rating Organization.
This Zacks sector – Investment Grade-Bonds: Misc has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
The Voya Investment Grade Credit Fund Class P, as of the last filing, allocates its assets in the top two major groups — Fixed Income and other asset classes. Further, as of the last filing, 2 Year Treasury Note Future Mar20, Ultra 10 Year US Treasury Note Future Mar20 and Future on US 5 Year Note (CBT) were the top holdings for IIGPX.
IIGPX has an annual expense ratio of 0.15%, which is below the category average of 0.82%. It has returned 16% over a year. The fund has no minimum initial investment.
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Zacks Investment Research