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.

Why Buy Taxable Bond Funds?

Taxable bonds are fixed-income securities issued by the country or state, income from which is not tax-exempt. These kinds of bonds are used to fund a particular project or facility. Taxable bond funds are likely to yield better results banking on improving manufacturing activity and continuing job creation. So, mutual funds with strong exposure to various taxable bonds are considered prudent investment options in an environment of steadily rising GDP.

According to Morningstar, all the categories of taxable bond funds have generated encouraging one-year and three-month returns. Emerging markets local-currency bond funds have returned 11.7% and 2.9% over the one-year and three-month time frames, respectively. Further, bank-loan funds managed one-year and three-month returns of 3.6% and 1%, respectively. Also, world bond bank-loan funds have registered one-year and three-month returns of 5.6% and 0.8%, respectively.

Buy These 5 Taxable Bond MutualFunds

This encouraging domestic backdrop calls for focus on five taxable bond mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) and have encouraging dividend yields. Moreover, these funds have impressive one-year and three-year returns, minimum initial investment within $5000 and low expense ratios.

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.

Hartford High Yield A (HAHAX - Free Report) seeks a high level of returns and even better returns in the long run. HAHAX invests a large chunk of its assets in non-investment grade debt securities. The fund focuses on investing in those securities and specific issuers that the fund's sub-adviser expects to offer both income and return.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 4.1% and 4%, respectively. HAHAX has an annual expense ratio of 1.06%, which is below the category average of 1.17%. Annual dividend yield of the fund is 5.17%.

Oppenheimer International Bond Y (OIBYX - Free Report) seeks returns. OIBYX invests its assets heavily in debt securities issued by companies based in developed and emerging markets. The fund invests in more than three different countries other than the United States. The fund invests in companies irrespective of their market caps.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 10.2% and 4.7%, respectively. OIBYX has an annual expense ratio of 0.75%, which is below the category average of 0.96%. Annual dividend yield of the fund is 4.19%.

Deutsche Enhanced Global Bond S (SSTGX - Free Report) seeks growth of returns through the appreciation of income and capital. SSTGX invests a large chunk of its assets in bonds issued by both domestic and foreign companies. The fund may also invest not more than 35% of its assets in junk bonds. The fund invests in corporate bonds, government bonds and asset- and mortgage-backed securities.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 4.7% and 2.4%, respectively. SSTGX has an annual expense ratio of 0.67%, which is below the category average of 0.96%. Annual dividend yield of the fund is 2.34%.

Prudential Short Duration High Yield Income A (HYSAX - Free Report) invests a huge part of its assets in high yield fixed income securities that are rate lower than investment-grade. The fund invests in investment with different maturities. HYSAX seeks maximization of income.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 3.7% and 4%, respectively. HYSAX has an annual expense ratio of 1.00%, which is below the category average of 1.17%. Annual dividend yield of the fund is 4.83%.

Vanguard Short-Term Investment-Grade Investor (VFSTX - Free Report) invests most of its assets in short-term debt securities that are rated investment grade. VFSTX invests in securities having ratings of A3 or higher. VFSTX may also invest in securities that are rated Baa1, Baa2, or Baa3, commonly known as medium-quality securities. VFSTX may also invest in intermediate-term securities but to a lesser extent.

This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 0.7% and 1.5%, respectively. VFSTX has an annual expense ratio of 0.20%, which is below the category average of 0.75%. Annual dividend yield of the fund is 1.98%.