High-yield Fund

Standard

Hello, everyone! Today, I brought the news from the Financial Services Commission that it plans to launch “Separate Taxation High-yield Fund” in March, 2014.

First off, do you know what a high-yield fund is? To put it simply, it’s a fund which invests in a junk bonds, a bond rated below-investment grade: Baa or lower, according to the Moody’s, or BBB or lower on the Standard & Poor’s scale. Basically, it has a higher risk of default or other adverse credit events but gives higher returns which makes it appealing to some investors.

Graph With Stacks Of Coins

Then, what made the FSC to come up with the idea of separate taxation on high-yield funds? Since the financial crisis in 2008, corporate bond market has been polarized; investors tend to prefer risk-free assets to risky ones. Because of this, large companies with relatively low credibility as well as SMEs have been experiencing hardships in financing their businesses. Furthermore, in case of KONEX, a stock exchange market exclusively for SMEs, demand for investment is still not enough to help the businesses with funding. For these reasons, the FSC thought of encouraging large investors to invest in bonds and stocks with high risk and high returns; they are the ones who can bear risks of buying those financial instruments.
Now, you might be curious about the details of this plan. Let’s take a closer look through this table.

high yield fund table

What would be the benefits earned from this revision? For companies, especially those with low credit ratings, it will help them finance their businesses by encouraging the demand for risky bonds. Also, it will set a stepping stone for KONEX market to develop. Investors who can afford to invest in risky assets can have an opportunity to invest in those financial instruments with less tax. In a broad perspective, the Korean capital market will be vitalized; the polarization of the corporate bond market will be mitigated and inflow of the capital will increase.

According to the official announcement by the FSC, it will undertake preparation work for the funds from this month as soon as it’s done with enacting the legislation. However, considering the importance of securing enough demand for those unpopular bonds, it is necessary that the FSC keep finding ways to promote high-yield funds other than the separate taxation.

-Seunghye Shin (seunghye312@gmail.com)

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