Bond funds are a type of pooled fund in which the combined (or “pooled”) money of different people is invested primarily in bonds. These funds usually place money in securities issued by the Philippine government, including Treasury notes, bills, and bonds. Such assets are guaranteed by the government, and so do not face a high default risk.
Corporate bonds, which are issued by companies to raise funds for expansion or other purposes, are another option that the manager of the bond fund can consider.
To reduce risk, the fund manager diversifies the type and amount of bonds that the fund invests in. A small amount of other asset classes can also be included in a fund’s portfolio to act as a buffer against volatility.
The fund manager also takes care of the research into the bond issuers and analysis of the market to arrive at the best decisions for the fund, including which assets to add and sell.
Many times, the goal of a bond fund is to provide income to its investors through the interest payments made by the government or corporation who issued the bond. The price (the Net Asset Value Per Unit or NAVPU) of the units purchased by your money when you invested money in the fund can also go up, earning you profit.
Bond fund classification
These funds can be classified according to the general maturity of the bonds that they hold.
Short-term bond funds hold mostly bonds that mature in 1 to 3 years, while medium-term bond funds put their pooled money mostly in bonds with a maturity of 3 to 6 years. Long-term bond funds focus mostly on bonds that will take at least 10 years to mature.
One thing to note is that the fund manager can sell some bonds and buy others in response to market conditions and the needs of the fund.
Are bonds funds right for you?
If you’re interested in bond funds, here a few things to remember:
Of all the risks that you will face by investing in a bond fund, the interest rate risk is the one that can’t really be avoided. If rates go up, there is a chance that your investment’s value will go down. Of course, there are things that the fund manager can do if this happens.
While the bonds held by the fund all have maturity dates, the fund itself does not. You can keep your money in it for as long as you want.
Compared to investing directly in bonds, bond funds have some advantages. First, liquidation is much simpler. You don’t have to wait for maturity or sell your bonds in the secondary market in case you need the money.
Also, your returns from the income generated by the fund and the increase in NAVPU may be higher overall than the interest you get from a Treasury bond. Of course, neither of these can be guaranteed.
Third, adding money to your investment is also much easier with a bond fund. For direct investment in bonds, you will have to go to the secondary market to get more bonds if the primary issuance period has ended.