Investors are parking more money in funds that invest in low-grade bonds and that also offer tax favors amid low market interest rates, data showed Thursday.
Cash flows into such funds amounted to 2.35 trillion won (US$2.14 billion) as of end of October in just seven months after their market debut in early April, according to the data compiled by the Korea Financial Investment Association (KOFIA).
In March, the country's financial regulator allowed local financial firms to sell a new type of high-yield fund, matched with tax benefits, until the end of this year as part of a policy effort to spur corporate financing.
The high-yield funds are required to have 30 percent of their portfolios comprised of speculative bonds rated "BBB+" or below.
Given such components, they entail greater risks, but offer higher returns.
In Korea, an investor can normally be levied up to 42 percent on financial income from mutual fund investments, but a revised law allows investors to pay less on their profits from investing in such high-yield funds.
"The high-yield funds would help low-rated firms raise cash,"
said Jun Sang-hoon, an official at KOFIA's securities and derivatives service division. "Also, investors' demand is rising as they are in search of high returns."
The association said 221 high-yield funds' average return stood at 3.26 percent as of end-last month.
The introduction of the funds came as the country's corporate bond market deteriorated because of the prolonged economic slump, with ailing companies unable to raise funds on low investor demand for low-quality debts.
Since last year, the slump has worsened as a slew of major companies here defaulted on cash shortages, including Tong Yang Group, the 38th-largest conglomerate now undergoing restructuring under court order. (Yonhap)
