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Conclusion

If you are seriously considering high-yield securities, you now have a yardstick: Almost four out of ten junk bond issues seem destined to have serious problems. For the individual investor, even the risk-loving investor, this is not just a chancy investment; it is more like a game of Russian Roulette.

Nevertheless, if you wish to raise your return on some portion of your portfolio, high-yield securities will assist you to that end. It would be folly for a fixed-income investor to place more than a small fraction of his or her funds in such bonds - perhaps 5 or 10 percent. If you are seriously considering junk bonds and can tolerate their high risk, you should be prepared to lose some portion of your capital. A loss of capital will, of course, reduce your return; perhaps even give you a negative return if a number of issues in your portfolio do default.

The only way an investor should invest in junk bonds is by diversifying. A selection of at least half a dozen issues will afford you some protection. Better still, if the high risk does not deter you, a high-yield mutual fund will give you professional management in a treacherous market. In addition, it can buy and sell these bonds without the concession in price associated with trades of a few securities.

For success of any financial market, one important prerequisite is for a well functioning credit market to offer market access to a much larger range of firms. If in a market, C-rated bonds are being issued and traded actively, it reflects positively upon that financial market.

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* Contributed by -
Ankit Chetan & Sudhanshu Duggal,
National Institute of Industrial Engineering (NITIE),
Mumbai.