Prime Time Financial

Depending on your attitude to investment risk it is likely to be a good thing to have at least some exposure to fixed interest investments, such as corporate bonds. These are at the lower end of the risk/reward scale meaning that they are less volatile than that other mainstay asset class, shares (equities).

Types of Corporate Bond

Much of the performance in corporate bonds comes from the interest that they pay rather than from capital growth (although the present state of the financial world has caused some exceptions at times, putting growth on a par with equities).

But there are different types of corporate bond investment, particularly if you are looking at what unit trust funds are available. These include "high yield" corporate bond funds, and it is these which some would say will perform best in the present environment.

Rather disparagingly (and perhaps misleadingly) these are also called "junk bonds". They are bonds (loans) typically issued by smaller companies, and the consequent additional risk that the company may miss out on paying the regular interest (or even on returning your capital at the end of the term) means that you get a higher return (remember that risk and return always go together - see Investment Focus - Risk and Return for more on that).

High Yield Bond Prospects

When the economic cycle is heading towards growth, even if those "green shoots" are difficult to be sure about, smaller companies which have weathered the difficult times are in a good position, and the prospect for high yield bonds is good.

Interest payments from high yield bond funds can be in the region of 6-9% (although we always need to be aware of the charges and of tax which will reduce that), so they can represent a worthwhile boost to the low rates obtainable from savings, if the extra risk can be tolerated.

Last reviewed 11th April 2012