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Do You Need a Multisector Bond Fund?

These three Silver-rated multisector bond funds offer attractive yields for investors comfortable with their risks.

Sarah Bush: Funds in the multisector bond Morningstar Category stand out for their willingness to take on more credit risk than portfolios in the intermediate core and core plus groups. Typically multisector funds hold between a third and two thirds of their portfolios in bonds with below-investment-grade ratings. As the category name suggests, multisector funds invest across a wide range of bond sectors. These include corporate bonds, sovereign developed- and emerging-markets debt, and securitized credit, with some holding large stakes in nonagency mortgages.

Because they take a hefty dose of credit risk, funds in this category often suffer losses during periods of equity market stress, which limits their diversification potential relative to stocks. As a result, intermediate core and core plus funds often make better anchors for a bond portfolio, especially if an investor has a large equity stake. Multisector funds have historically offered attractive yields and total returns for those comfortable with their risks.