When we talk about investments, most people immediately think of stock markets and investing in the shares of companies. It’s an exciting area and can be an emotional roller-coaster as one day your investment could be increasing in value, only for it to plummet the next.
That’s why diversification is key to achieving long-term financial goals. If you have all your eggs in one basket, it could go horribly wrong. But if you spread your investment, the ride could be a lot smoother. One popular investment option that offers diversification and stability is fixed interest funds – or bond funds as they are sometimes called.
What are fixed-income funds?
Fixed-income funds are the boring cousins of equity funds. Think accountant vs explorer. Just like equity funds, they pool the money of lots of investors together, But, unlike equity funds, they don’t invest in the shares of companies – they invest in their debt instead.
Just like you or I sometimes need to borrow money to buy a house, or a car, companies and governments also need to borrow money to finance projects. These loans are called bonds and, in return for lending money to these companies or governments, investors are given a fixed interest rate over a certain time period before their money is returned to them. For example, company A may offer to pay me 4% per annum for five years.
What are the advantages of fixed-interest funds?
One of the main advantages of fixed-interest funds is their ability to offer investors diversification. Individuals get exposure to a wide range of bonds, spreading their investment across different issuers, industries, and geographies.
Another advantage is that fixed-interest funds are generally considered to be less volatile than stocks, making them an attractive investment option for more risk-averse investors.
They also generate income through regular interest payments from the underlying bonds in the portfolio, providing investors with a steady stream of income.
While bond prices can fluctuate, especially in response to interest rate changes, the main objective of bond funds is to preserve capital.
Fixed-interest funds are also managed by professional investors who possess the expertise and resources to conduct thorough credit analyses, monitor market conditions, and make informed investment decisions. When you consider that a single company can have multiple bonds on offer, you can understand why having such expertise and lots of resources is necessary to conduct good research.
What investment options are there?
There is a wide range of fixed-income funds available to cater to different investor preferences and risk appetites. Some funds focus on specific sectors, such as government bonds, corporate bonds, or emerging market bonds. Others might invest in all the different types of bonds on offer.
So it’s important that investors choose a fund that aligns with their investment goals and personal risk tolerance. Here are some examples:
M&G Emerging Markets Bond
This fund invests in one of the riskier parts of the fixed-interest world: emerging markets. It has the flexibility to invest across the whole emerging market universe from Eastern Europe through to Latin America and emerging Asia. It can invest in both government and corporate bonds, denominated in local currencies or in the US dollar. Which some emerging market companies and governments prefer. The manager uses her vast skill set in this asset class to analyse the macroeconomic environment and individual companies. To pick what she believes to be the best mix of bonds for this portfolio.
Baillie Gifford Strategic Bond
This fund gives access to a concentrated portfolio (typically 60-80 stocks) of primarily UK fixed-interest securities from both investment grade (higher quality companies). And high-yield (companies that are deemed more likely to default on their loans) segments of the market. Unlike many other funds in the strategic bond sector, the managers of this fund aim to add value almost exclusively by picking individual bonds. And do not try to second-guess central bankers when it comes to interest rate movements.
GAM Star Credit Opportunities
This is a high-income bond fund with a unique strategy. The idea is to invest in the ‘junior debt’ of investment-grade companies or in other words. Invest in the riskiest bonds of very high-quality companies. This allows the fund to generate a good income (riskier bonds tend to pay higher interest to compensate the investor for taking on more risk). Whilst still keeping a high-quality portfolio. This means the fund is heavily invested in the debt of financial companies. This is where the best opportunities often lie.
Royal London Corporate Bond
This fund offers access to a portfolio of predominantly, but not exclusively, investment-grade corporate bonds. The managers have proven adept at delving into parts of the fixed interest market where others fear to tread and identifying issues that offer superior risk-adjusted returns. The process is risk aware, concentrating on avoiding losers rather than picking big winners. This will provide an attractive and stable yield over time.
Fixed-interest funds offer numerous advantages that make them an attractive investment option for a diverse range of investors. Their diversification and income generation potential makes them a valuable addition to any investment portfolio. However, as with any investment, it is essential to conduct thorough research and assess your own individual risk tolerance, before making any investment decisions.