Look Here to Invest in Distressed Assets

Huge profits are waiting to be made in distressed securities.

The challenges, as in most investment opportunities, are: 1) when to get in and 2) which distressed securities to buy.

As for when to get into distressed securities, it's doubtful that anyone really knows. With the credit crunch still bombarding the financial sector, inflation and strapped consumers squeezing profit margins and interest rates on the ascent, now would seem like a horrible time. But markets are notoriously early in anticipating recoveries, so maybe a turnaround is closer at hand than most investors suspect. In fact, no one knows for sure.

A prudent answer to the second problem -- which distressed assets to buy -- is, like with many investment decisions, diversify your holdings.

One way to achieve diversity in this risky area is by buying shares in mutual funds that invest in distressed securities. Many offer the added advantage, for those uncertain of timing, of "dollar cost averaging" programs where investments are spread out over time.

The quartet of funds in the accompanying table were identified by parsing TheStreet.com Ratings database for those with stated objectives that included intentions of investing in distressed securities.

The list includes two open-end mutual funds that invest in, among other things, distressed company equities and debt instruments. In addition, it contains a pair of closed-end funds committed to focusing on distressed fixed-income investments.

The stated objective of the Franklin Mutual Recovery Fund(FMRAX - Cramer's Take - Stockpickr), is to "achieve superior risk-adjusted returns with a moderate correlation to the U.S. equity markets" by investing in equity and debt instruments in the three categories.