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3 Bond Funds to Benefit From Record Inflows

Nitish Marwah

Despite the recent positive developments related to trade war between the United States and China, equity prices have wobbled due to uncertainties related to a resolution to the trade spat. This is evident from the fact that investors have been rotating out of mutual funds invested in stocks and risky corporate debt to high-quality bonds which are perceived as safer.

To put things into perspective, funds with exposure to U.S. stocks witnessed outflows worth $6.2 billion in the week ending Oct 9. This marked the third consecutive week of such withdrawals. Furthermore, U.S. high-yield or junk bonds also suffered $346 million worth of outflows in the period.

Market volatility throughout summer, coupled with a slowdown in the global economy, has made investors jittery, thereby leading to the outflow from stock funds. Morningstar reported that investors have been investing heavily in traditionally safer assets over the past few days. Bond funds witnessed inflows of a whopping $118 billion in the period. Also, money-market funds witnessed inflows of as much as $225 billion.

Meanwhile, for the third consecutive week, U.S. investment grade bonds saw net inflows of $6.4 billion for the week ending Oct 9.

Meanwhile, weak economic data in the recent past have also weighed on investor sentiment. The ISM Manufacturing Purchasing Managers’ Index (PMI) hit its lowest level in more than 10 years at 47.8% in September. The metric witnessed a contraction for the second straight month.

Further, U.S. retail sales declined for the first time in seven months in September. The metric dipped 0.3% last month as American households reduced spending on building materials, online purchases and automobiles. Under such circumstances, buying bond funds seems prudent.

3 Bond Mutual Funds to Buy

We have, thus, selected four bond mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds encouraging one and three-year returns. Additionally, the minimum initial investment is within $5,000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Northern California Tax-Exempt NCATX fund seeks a high level of current income exempted from regular federal income tax and California state personal income tax. NCATX invests the majority of its assets in debt securities that are believed to offer returns exempted from California state personal income tax and regular federal income tax. Moreover, NCATX is expected to maintain a dollar-weighted average maturity between 10 years and 30 years.

This Zacks sector - Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

NCATX has a Zacks Mutual Fund Rank#1 and an annual expense ratio of 0.47%, which is below the category average of 0.87%. The fund has one and three-year returns of 8.8% and 2.9%, respectively.

Lord Abbett Intermediate Tax Free Fund Class A LISAX invests 80% of its net assets in municipal bonds that are capable of paying interest exempt from federal tax. The fund aims for the maximum amount of interest income exempted possible from the federal income tax, with reasonable risk. LISAX uses the Bloomberg Barclays 1-15 Year Municipal Bond Index's volatility as an approximation of reasonable risk.

This Zacks sector - Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

LISAX has a Zacks Mutual Fund Rank#2 and an annual expense ratio of 0.70%, which is below the category average of 0.74%. The fund has one and three-year returns of 8.3% and 2.8%, respectively.

Fidelity Advisor California Municipal Income Fund Class A FCMAX seeks tax-exempted, high-current income. FCMAX invests a large share of its assets in municipal debt securities that are rated as investment-grade and expected to pay interest income free from federal and California personal income taxes. FCMAX invests a minimum of one-fourth of its assets in municipal securities.

This Zacks sector - Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FCMAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.79%, which is below the category average of 0.87%. The fund has one and three-year returns of 8.5% and 2.6%, respectively.

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