South Korean investors are putting more money into funds that invest in low-grade bonds amid low market interest rates, data showed Thursday.

Inflows to such funds amounted to 3.19 trillion won (US$2.9 billion) as of the end of December, just nine months after their market debut in early April last year, according to the data compiled by the Korea Financial Investment Association (KOFIA).

In March last year, the country's regulator allowed local financial firms to sell a new type of high-yield fund, matched with tax benefits, in 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 high-yield funds.

According to the association, the high-yield funds invested 1.12 trillion won in corporate bonds rated "BBB+" or below last year, which is about 11 percent of sales of such debts that totaled 10.7 trillion won.

"The high-yield funds will 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 funds were introduced as the country's corporate bond market deteriorated due to the prolonged economic slump. Ailing companies became unable to raise money as investors shunned low-quality debts.

Since late 2013, the slump has worsened as a slew of major companies defaulted on cash shortages, including Tong Yang Group, the 38th-largest conglomerate now undergoing restructuring under court order. (Yonhap)