In the first quarter, investors’ interest shifted more toward taxable bond funds than equity funds. As per the January and February Morningstar monthly fund flow report, taxable bond funds continued to hold investors’ fancy among the major category groups. Also, per Investment Company Institute (ICI) and Lipper data, the fund category group attracted high inflows in the first quarter.
Taxable bond funds are debt securities whose interest income is taxable at state or federal levels. Even though funds from this category carry higher risks they do provide better yields than government bond funds. Hence, investing in taxable bond funds might be a wise option for bond fund investors willing to take on relatively more risk in search of higher returns.
Taxable Bond Funds Gain Luster in Q1
According to Lipper, taxable bond mutual funds witnessed estimated inflows of $121 million for the week ended Mar 28. In contrast, domestic equity funds posted outflows of $2.547 billion. Additionally, domestic equity mutual funds posted outflows of $8.116 billion for the first three weeks of March, while taxable bond mutual funds reported inflows of $13.483 billion during the same period, per ICI.
Moreover, per ICI’s official survey of the mutual fund industry, net new cash inflows in taxable bond funds was $38.186 billion in the first two months of this year. In contrast, domestic equity witnessed outflows of $44.114 billion.
In February when all the three key U.S. indexes entered correction territory after hitting all-time highs on Jan 26, investors pulled out their money from several fund categories. Fund flows for all the key category groups was a negative $7.7 billion, as compared with January’s fund flows of a positive $128.1 billion, the best since January 2013.
However, taxable bond was one such fund category that managed to attract inflows of $5.2 billion, despite a weak February. In January, taxable bond funds, which registered the highest monthly inflows of $47 billion among all the category groups, distributed its investment almost equally in both passive and active funds.