Investors need to look at the total return of income funds rather than focusing on yield returns, according to a recent Morningstar report.
The report which examined fixed-interest funds looked at the growing number of yield-focused and benchmark agnostic strategies now available to investors.
Investors have developed a growing appetite for yield-generating products with many increasingly preoccupied with a strategy's income return.
Moreover investors have experienced losses from their equity investments prompting them to re-evaluate their income needs.
Many high-yield and income focused funds have been launched to meet this demand for income.
Higher-yields, however, means more credit and liquidity risks, the report said.
"We urge investors and advisers to always keep a total return rather than yield-focused perspective," the report, published last week, said.
Credit strategies can deliver higher-income objectives. These strategies tend to invest in non-government debt securities.
"The potentially higher total returns are, however, accompanied by vulnerability to widening credit spreads, which may result in returns which are more highly-correlated to equities than a fund incorporating both sovereign and credit instruments," the report said.
The report also noted the importance of funds being able to meet liquidity needs as well as provide regular distributions and maintain capital stability.
Lack of liquidity became an issue when many mortgage funds demonstrated a lack of liquidity in late 2008.
"It's important to understand how a more flexible strategy fits within the context of an existing fixed-interest allocation, to ensure that risk exposures are adequately diversified," the report said.
