All about asset classes

Let’s bond: Getting started with bond investing

Are you looking to complement your income? Will bond funds help you diversify* your portfolio?

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What is a bond fund?

Buying a bond means an investor is lending money to bond issuer, usually for a fixed time period at an agreed rate of interest paid regularly.

Bond funds invest almost exclusively in bonds and can offer potential stability and reliability of income over time. Buying into a bond fund allows investors to place their money in a range of bonds with the aim of spreading risk and enhancing opportunity.

Bond funds can:

  • Invest in government bonds and corporate (company) bonds.
  • Invest in different regions, such as the eurozone, USA, or emerging markets.
  • Have different maturities, in the short term and long term, and can be in different currencies.
  • Pay fixed or variable interests.

The advantages of a bond fund 

  • Diversification*: It allows investors to diversify and spread their risk because bonds tend to react differently than other investments types to macroeconomic, geopolitical and market events.
  • Income preservation: Bond funds can offer a steady income through interest payments.
  • Active management: Although the interest (coupon) a bond pays is usually fixed, the market value of bonds can change over their lifetime because they react to changes in interest rates. Bond fund managers aim to take advantage of these price and interest rate changes to create higher returns or reduce risks for their investors.
  • Accessibility: Bond funds allow investors to trade in and out of their investments at any time. Whereas buying individual bonds might tie an investor until the bond reaches maturity.

What are the risks?

 

  • Interest rates: Bonds are quite sensitive to interest rates which is the major cause of volatility in bond markets. Bond prices generally decrease when interest rates rise and conversely they increase when interest rates fall.
  • Credit risk: This type of risk is related to bonds issued by companies and reflects the risk of default of the issuer. The reliability of a corporate issuer is expressed with the credit rating.
  • Inflation: The general increase in prices can affect bonds negatively as it erodes the real value of the income generated with bonds.

How can I evaluate quality and risk?

Bonds’ quality is represented by credit rating. A credit rating tells the buyer how much risk they are taking by buying the bond. If the credit rating1 is high, say AA, the bond issuer is highly creditworthy and is expected to repay the debt and interests in full with no delays. These bonds are called ‘investment grade’.

If the credit rating is low, say CCC or D, the bond issuer is considered less reliable and will typically have to pay a much higher interest rate to the bondholders for accepting a higher risk. This type of bond is normally referred to as a ‘high yield’ bond.

 

To recap

Bond funds seek to offer capital preservation and a regular income. They can help you diversify* your portfolio and mitigate the effects of inflation which erodes the purchasing power of cash.

1Credit ratings are assigned by independent agencies like S&P, Moody’s or Fitch.

* Diversification does not guarantee a profit or protect against a loss.

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Unless otherwise stated, all information contained in this webpage is from Amundi Asset Management S.A.S. and is as of 10 June 2024. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Neither Amundi Singapore Limited nor Amundi Asset Management S.A.S. accepts any liability whatsoever, whether direct or indirect, that may arise from the use of information contained in this webpage. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. 

Date of first use: 10 July 2024
Doc ID: 3651111

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