The Financial Conduct Authority (FCA) has outlined risks to consumers over corporate bonds, including potential liquidity risks.
In a statement, the FCA warned consumers that while there is a limited risk to capital when investing into corporate bond funds, they are not risk free.
The regulator said that extreme market conditions could lead fund managers unable to sell sufficient quantities of bond holdings to fulfil redemption orders, which could lead the investor unable to sell fund units and access money quickly.
'There is low trading activity in the markets for many of the bonds held by these funds – and the market for underlying bonds has shrunk in recent years. Fund managers manage this risk for you, by monitoring the values that can be bought and sold in each bond and limiting the size of funds’ holdings in any one bond,' the FCA said.
'Most of the time fund managers ensure that investors are able to buy and sell their units on any day. However, in very extreme market conditions fund managers could become unable to sell sufficient quantities of bond holdings to fulfil redemption orders, leaving investors unable to sell fund units.'
Additional risks include the impact of interest rate movements on corporate bonds and fund unit prices.
It also warned that while company defaults are unlikely such events could also impact the level of returns generated by the funds.
The FCA has also urged investors to seek professional advice if they are having difficulty understanding corporate bond funds or are unable to do the due diligence around the investment.