3 Investment-Grade Bond Funds for a Stable Portfolio

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As the global economy continues to have an uncertain outlook, investors keep looking for a strategy wherein they can generate a steady flow of income while minimizing risk. Investing in the debt market can have its cons in a macroeconomic scenario like the one prevailing currently. However, when major bond rating agencies certify certain bond funds as investment grade, it becomes difficult to look beyond.

Investment-grade bonds funds comprise corporate and government debt that bond rating agencies like Fitch, Moody’s, and S&P think are very likely to be paid back, alongside interest. These agencies weigh the risk and return potential of bonds, and grant them ratings. The top-rated bonds are considered investment grade. These are considered less risky than stocks as they do not experience the same price fluctuations.

Even in the sordid eventuality that a company goes bankrupt, bondholders get preference over shareholders, entailing that the amount invested is fully secure. They also generate a steady stream of income via bond interest payments. So, even though historically, stocks provide more liquidity and higher returns when times are good, investment-grade bonds provide a fine balance of lower risk and steadier returns in volatile markets.

It is thus essential for investors looking to diversify their portfolio or having a low-risk appetite in the current scenario to check the credit quality rating of a fund while venturing into the debt market. Bonds that are rated low are inherently speculative in nature and do not serve the purpose of adding a safetynet.

In summary, investment-grade bond funds provide a much-required canopy when the heat is on and continue to provide a steady income.

Hence, with an economic slowdown looming large in the U.S economy, astute investors can look to invest in investment-grade bond funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

We have thus selected three such investment-grade bond funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio.

Federated Hermes Corporate Bond Strategy Portfolio FCSPX usually invests in a diversified portfolio of investment-grade, corporate fixed-income securities. FCSPX’s average duration varies and may range between one and 10 years, depending on interest rates. The fund also invests in treasury securities, government securities and derivatives.

Three top holdings of FCSPX are 72.5% in Total Misc Bonds, 4.2% in Total Cash and 1% in Verizon Comm Inc. Jerome D. Conner has been the lead manager of FCSPX since Feb 27, 2010.

Federated Hermes Corporate Bond Strategy Portfolio has 3-year and 5-year annualized returns of 0.7% and 2.6%, respectively. Its net expense ratio is 0.23% compared to the category average of 0.70%. FCSPX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Dodge & Cox Income Fund DODIX seeks a high and stable rate of current income alongside long-term preservation of capital. Usually, DODIX invests a vast majority of its total assets in investment-grade debt securities and cash equivalents. For its investment purposes, “investment grade” is defined as securities rated Baa3 or higher by Moody’s Investors Service, or BBB- or higher by Standard & Poor’s Ratings Group or Fitch Ratings, or equivalently rated by any nationally recognized rating organization. If unrated, the fund has to be considered to be of similar quality by Dodge & Cox.

The three top holdings of DODIX are 43.4% in Total Misc Bonds, 8.6% in UMBS TBA 30 Year and 6.9% in Total Cash. Adam S. Rubinson has been the lead manager of DODIX since Feb 14, 2010.

Dodge & Cox Income Fund has 3-year and 5-year annualized returns of 1.1% and 2.2%, respectively. Its net expense ratio is 0.42% compared to the category average of 0.75%. DODIX has a Zacks Mutual Fund Rank #1.

Permanent Portfolio Versatile Bond Portfolio PRVBX seeks to earn high current income while limiting risk to principal by investing the majority of its assets in a diversified portfolio of corporate bonds rated ‘A’ or higher by Standard & Poor’s and having a remaining maturity of 24 months or less. Dividends and capital gains are distributed annually.

Three top holdings of PRVBX are 11.5% in Total Preferred Stocks, 6.3% in BAT Capital Corp. and 6.1% in El Paso Energy. Michael Joseph Cuggino has been the lead manager of PRVBX since Apr 30, 2003.

Permanent Portfolio Versatile Bond Portfolio has 3-year and 5-year annualized returns of 3.7% and 4.1%, respectively. Its net expense ratio is 0.64% compared to the category average of 0.68%. PRVBX has a Zacks Mutual Fund Rank #1.

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