What are fixed income funds?

Funds investing in fixed income products are an alternative to direct fixed income investments, such as bonds. The investor will gain several investments with even a small sum, which will increase the expected return of the investments due to diversification. Fixed income investments often generate a good yield when equity prices are falling, and vice versa. It is a good idea to spread your investments over equities and fixed income products.

  • The yield is determined by the performance of the fixed income and credit risk markets.
  • You can invest very small sums, as the minimum subscription is just 10 euros.
  • You can buy and sell fund units at any time.

Yield from fixed income markets

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.

Fixed-income funds are less risky than equities

Investing in fixed-income funds is one way to reduce risk in your portfolio, as it often carries less risk than investing in the stock market. However, you should keep in mind that fixed-income funds are not completely risk-free. 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 the price 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 the fixed-income investment falls, and vice versa.

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

Wide range of funds investing in fixed income instruments

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

Short-term fixed income funds

Short-term fixed income instruments

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 characterized by higher risk and expected return.

Return and risk
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