Bond Funds
Bond funds invest primarily in bonds and other fixed-income securities. By investing across a range of bonds, a fund can provide exposure to different issuers, maturities, interest rates and credit qualities.
Bond funds may invest in government or corporate bonds, as well as bonds issued in different markets and currencies. The investment approach and level of risk will depend on the types of bonds held by the fund.
Understanding Bond Fund Risk
Bond funds are exposed to the risks of the bonds they hold. These may include credit risk, interest rate risk, liquidity risk and, where applicable, currency risk.
Bond fund values can fluctuate as market conditions and interest rates change, and there is no guarantee that investors will receive back the amount originally invested.
Key Features of Bond Funds
Diversification
Invests across a range of bonds, issuers, sectors or markets, helping to spread exposure.
Professional Management
Fund managers select and monitor bonds based on the fund’s investment objectives and strategy.
Income Potential
Bond funds may generate regular income through interest payments from the bonds they hold.
Liquidity
Bond funds can provide access to a portfolio of bonds through a single investment, which may make buying and selling more straightforward than investing in individual bonds.
Credit Exposure
Funds can invest in bonds with different levels of credit quality, from higher-rated issuers to higher-yielding bonds with greater credit risk.
Interest Rate Sensitivity
The value of bonds can be affected by changes in interest rates. Generally, bond prices may fall when interest rates rise and increase when rates fall.
Bond Fund Strategies
High-Yield Bond Funds
Invest in bonds with lower credit ratings that typically offer higher yields to compensate investors for taking on greater credit risk.
Index Bond Funds
Aim to track the performance of a specific bond market index, generally using a passive investment approach.
Investment-Grade Bond Funds
Invest primarily in bonds issued by borrowers with higher credit ratings. They generally offer lower yields than higher-risk bonds, but may have lower credit risk, although they are not risk-free.
Maturity-Focused Bond Funds
Invest in bonds with a particular maturity range, such as short, medium or long-term bonds. The maturity profile can influence the fund’s sensitivity to changes in interest rates.
