Fixed income funds

Investment profile

The yield paid on fixed income funds is determined by the performance of the fixed income markets. Fixed income funds can be divided into three categories: short-term, medium-term and long-term.

Fixed income funds diversify their investments over the bonds of different issuers and countries. They also provide time diversification in their investments, which means they buy bonds with varying maturities and at different times. The bonds' issuers can consist of governments, municipalities and other public-sector entities, as well as financial institutions and companies.

Each fund's selection criteria, or investment policy, for its investments is outlined in the key investor information document and the fund's rules.

Fund selection

Fixed income funds can be divided into three categories: short-term, medium-term and long-term.

Short-term fixed income funds

Money market funds and other short-term fixed income funds

Medium-term fixed income funds

Combine short and long-term fixed income instruments

Long-term fixed income funds

Invest mainly in long-term bonds with a maturity of more than one year and other fixed income instruments. The bonds' issuers can consist of governments, municipalities, other public-sector entities and companies.

Government bond funds

Government bond funds mostly invest in bonds issued by governments and other public-sector entities. The main risk involved in these funds is the interest rate risk.

Corporate bond funds/investment grade funds

Funds investing in bonds issued by companies (such as banks) are called corporate bond funds. The most important risk involved in such funds is the credit risk, i.e. the uncertainty pertaining to changes in the solvency of the issuer.

High yield corporate bond funds

High yield funds invest in bonds issued by companies with a low credit rating. They are characterised by higher risk and expected return.

Risk and return

The yield on fixed income funds is based on the performance of the fixed income market, which is more stable than that of the equity market. The flip side of stability is a lower yield. The yield paid on fixed income funds is dependent on the interest rate level and its fluctuations, the selected investments and the timing of buys and sells.

In fixed income funds the main risks consist of the interest rate risk and the credit risk.

The interest rate risk describes the sensitivity of a fixed income investment to changes in the interest rate level. Changes in the interest rate level have a reverse impact on the price of the fixed income investment; in other words, when the interest rate level rises, the price of a fixed income investment falls, and vice versa.

The credit risk refers to uncertainty over the solvency of the bonds' issuer. When the credit risk involved in the investment is expected to rise, the value of the investment will decline, and vice versa.

All investments in fixed income instruments are exposed to the risk of a rise in interest rates during the investment period. 

If market interest rates rise and the investor sells his or her fund units, the yield may be lower than expected, or even negative. This is due to the fact that, as interest rates rise, the market value of bonds or money market investments in the fund's portfolio declines, lowering the value of each fund unit. How much this mechanism impacts each fund varies, depending on whether it is a money market fund, medium-term fixed income fund or a bond fund.

The value of fund units may increase or decrease depending on the market situation. The investor may lose a part or all of the invested capital.