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- Fixed Income funds
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A fixed income fund invests in bonds. These may include government bonds, corporate bonds, mortgage bonds, municipal bonds, zero-coupon bonds, or high-yield bonds.
1. Fund or a direct investment – what is the difference?
A fixed income fund may specialize in a particular bond category or mix various bonds within its portfolio. The benefit of fixed income funds over a direct investment lies in their broad diversification. With a fixed income fund, an investor not only invests in a single security.
2. What are the risks of bonds?
Bonds are so-called debt securities. This means that the buyer of a bond effectively provides the seller with a loan. The buyer becomes the creditor, and the seller the debtor. As the bond purchaser wishes to get their money back at the end of the term, particular attention is paid to the creditworthiness/solvency (credit rating) of the bond issuer. Nevertheless, an investor cannot be sure that a bond will be redeemed in full, or whether it will be redeemed at all. Investing in a single bond therefore entails a risk. Broad diversification across several securities therefore makes sense.
3. How can ratings help investors?
Assistance is provided by so-called rating agencies. They try to assess the creditworthiness of states and companies. These ratings are also available for fixed income funds. For example, there are funds that only invest in investment-grade bonds. Beneath this category is the sub-investment-grade segment, which accordingly has a lower rating. The appeal of these junk bonds lies in their high rate of interest. However, this then has to be acquired with a considerably higher level of risk.
4. Should I invest in an individual bond or a fixed income fund?
A key difference between bonds and a fixed income fund lies in the fact that a fixed income fund comprises a large number of bonds and does not have a limited term. A bond, on the other hand, theoretically starts at 100 percent, and also ends at 100 percent. In between, there are interest payments and perhaps also significant price fluctuations due to changes in interest rates. If the issuer has a good credit rating, the bond buyer does not bear any price risk upon maturity. In contrast, a fixed income fund can gain or lose value and does not guarantee a 100-percent repayment.
5. Why is duration such an importantkey figure for fixed income funds?
The duration describes the average commitment period in a fixed income fund. Loosely speaking, it shows how long it takes for an investor to be repaid their invested capital. The duration reveals, among other things, how sensitively a fixed income fund reacts to changes in interest rates. Those expecting falling interest rates and therefore rising bond prices should opt for a longer duration as bonds with longer terms react more strongly to interest rate changes. Those who anticipate rising interest rates and therefore falling bond prices will prefer a shorter duration in order to limit the price losses within the fixed income fund.
