An investment fund is a financial vehicle that pools money contributed by a group of individuals to invest in different types of assets. There are numerous investment funds and numerous ways to classify them, however they are most often categorised according to the type of asset in which they invest. A bond fund, as the name suggests, is a fund invested primarily in bonds and other debt instruments. This particular type of fund may be a good addition to the portfolio of medium to long-term investors.
Bond funds offer many advantages. They can be a more efficient way of investing in bonds than buying individual securities since it gives investors, especially investors with smaller sums of money, access to a wider variety of bonds than they might otherwise have been able to afford as in individual investor. Another advantage of bond funds is that the diversification they offer can help manage overall risk. This is because bond funds typically own several individual bonds of varying maturities and so the impact of any single bond’s performance is lessened if that issuer should fail to pay interest or principal or if the value of the bond falls. Investors who don’t have the time or expertise to research and evaluate bonds on their own, or simply want to avoid the hassle, will appreciate the fact that the funds are professionally managed. Bond funds put investors’ savings in the hands of investment managers or “fund managers” who scan the market for the best opportunities to generate a profit.
Before choosing a bond fund, it’s important to know its risks, costs, and other features, and to spend the time in doing the research to make an informed decision. For example, most bond funds focus on a specific corner of the fixed income markets such as corporate or government bonds, highly rated “investment grade” debt or securities rated below investment grade. Funds that are heavily concentrated in higher risk, low quality bonds will typically deliver greater returns. But the reality is that this transforms the nature of the bond fund as these risky, volatile junk bonds also result in more volatile returns. This is important information as it will help you to choose a bond fund that is appropriate for you.
Performance is also an important factor to bear in mind. Since fund managers call the shots, deciding which bonds to buy or sell based on the fund’s objectives/strategies, investors should look for a bond fund with a good track record over a long period of time. Even though past performance is not a guarantee of future performance, it will still give you comfort to know that your fund manager has been successful in managing funds in different interest rate environments and through financial market crises. As with other asset categories, how much of your portfolio you want represented by bond funds will depend on your investment time frame, risk tolerance and objectives.
Toni-Ann Neita-Elliott, CFP is the Vice President, Sales & Marketing at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm
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