Our Portfolio
Investments
Mutual Funds
Bond Funds
Bond funds typically invest in corporate or government bonds. The value of the underlying bonds fluctuates with interest rates. A bond is an IOU issued by a company (a corporate bond) or government entity or agency (a government bond). When your mutual fund buys a bond, it is loaning money to the issuer for a set period of time. In exchange, the issuer pays interest at specified intervals, and returns the full amount when the bond matures. However, in a mutual fund, bonds are bought and sold all the time, so the fund rarely holds the bond until maturity.
While bonds are generally considered relatively conservative investments, they do go up and down in price as interest rates change. Because of this interest rate risk, a portion of one's original investment can be lost when bond holdings are sold. Another risk factor to consider is credit risk.
Some bonds are issued by well-known companies with plenty of assets and cash flow to pay off their debt. These are considered investment grade bonds. Other bonds are called high yield or "junk" bonds because the issuer has a higher than normal risk of not being able to repay its debt. Because a mutual fund holds bonds issued by many companies, default by any one issuer shouldn't affect your return too much. But high yield bond funds, which hold bonds that may produce higher income payouts than other bonds, tend to be more volatile (go up and down in value) more than investment grade bond funds, which is why they are considered riskier.
Investments in lower rated and unrated bonds are subject to a greater loss of principal and interest than investments in higher rated securities.