How to Invest in High Yield Mutual Funds

High yield mutual funds typically seek high levels of current income; capital appreciation potential may be sought as well, but as a secondary goal. These funds tend to invest in securities that have lower credit qualities. While they usually offer higher income, they may also have high volatility tendencies. However, high yield funds may help with portfolio diversification, even improving your portfolio's risk profile.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Internet access
• Financial adviser or broker
• Money to invest

1. Determine your level of risk tolerance and consider your time frame for meeting your investment goals. With these factors in mind, decide whether funds that invest in lower-quality bonds fit in your investment plans.
2. Understand that high yield mutual funds should probably not be your only holdings; diversification is key. With the help of a financial adviser or broker, determine the portion of your portfolio that is best allocated to high yield mutual funds.
3. Keep in mind that high yield bond funds may lose when the economy slows down or if a company is unable to repay its loan. Factor this risk into your investment plans.
4. Decide whether you want a load or no-load mutual fund. With load mutual funds, you can benefit from the advice and guidance of a financial adviser or broker. On the other hand, no-load funds allow you to avoid sales charges, putting more of your money into your actual investment.
5. Use MorningStar.com or LipperWeb.com to perform research concerning high yield mutual funds. Compare the funds that interest you against other funds in the same category.
6. Select the funds that interest you and request prospectuses or download them online. Review these prospectuses, as well as other reports available for the funds you are considering.

Tips & Warnings

• Spend some extra time researching high yield mutual funds before you invest. You want to be sure that the potential for earning is enough to outweigh the risks involved.
• Keep in mind that mutual funds provide opportunities for investors at all levels. Unlike some other investments, mutual funds often have low minimum investment amounts, ranging from less than $100 to a few thousand dollars. Some mutual funds offer automatic investment plans as well.
• While looking at the past performance of a high yield mutual fund is important, the past is not an accurate indication of future performance. Never invest based solely upon a mutual fund's performance history.