Mutual Fund Site

Our site has seen a lot of traffic coming in to see what our 2010 Top Pick has been… and why. Although more and more investment sites are starting to see the true potential in high yield investments, there is still a lot of negativity when it comes to these types of mutual funds particularly for this year (2010). A lot of the uncertainty might have to do with just how well these bond funds have performed over the past year (2009), some returning just as much as the S&P 500 (and some returning even more). While there is a fair amount of risk associated with the types of funds, we are at a point in history that may never repeat itself for the balance of our lives.

…we are at a point in history that may never repeat itself for the balance of our lives.

At the Mutual Fund Site, we believe there are two things working in the favor of investors who look at high yield investments for 2010 (and our High Yield Investments: Top Pick for 2010 in particular). We will outline the advantages briefly:

1. As markets improve, so will yields on these high yield investments. While this statement runs contrary to the academic studies of the past, consider this: The credit crisis of 2007 – 2009 pushed rates on all types of non-government borrowing sky high. Government rates of course fell through the floor due to demand, and this high demand for government bonds and low money supply for corporate bonds created a wide spread between corporate and government rates.

As the economy improves, rates typically increase in order to keep the economy from overheating. This time is different because corporate rates are already high, meaning they will either stay the same or drop marginally. We see a few common reasons for this. The first being that with there being less perceived default risk, more money supply will head into the corporate side. As supply rises, rates will start to drop (or in the case of rising rates, stay the same). This will have the effect of narrowing those spreads between corporate and government rates. As well, default risk will tangibly reduce because as the economy recovers those companies that were seen as “suspect” will become healthy again while those that were expected to fail will have already failed and be gone.

2. High income, high market value. Probably the most persuasive reason to hold high yield investments today is that the rates story (outlined above) will provide bond holders (again, visit our Top Pick story) will benefit from higher income. And if turns out that those rates start to drop rather than staying the same, then the other part of this equation is that the bonds in question will start to appreciate in value (remember, as rates drop, prices rise). This presents high yield investors with a double-bonus system of enjoying higher income derived from those original, inflated rates and the added bonus of higher market prices that the markets will pay for such high-rate bonds.

Remember, the primary motive to invest in bonds is the income (hence the “income class”). Unless the economy makes a miraculous recovery and starts providing returns that are far in excess of expectations, then those rates will not skyrocket. They will, at the very least, remain level, making high yield investments a great place to invest for 2010. And if your income class knowledge is sub-par (or you want to properly invest in this class) the only way to play this game well is through mutual funds or ETF’s.