There was a time when owning the best bond funds was not so important, but if you do not have the best bond funds in 2015 and beyond, you may not want to own one. For many years, these income-generating funds have been considered relatively safe investments and have also proved successful.
These funds are also known as INCOME FUNDS. Their goal: to generate higher interest income, as a relatively safe investment. When you invest in these securities, you only have a very small portion of a very large portfolio of fixed income debt securities called "bonds." We will keep things simple here to bring home the most important thing you need to know about them: in 2015 and beyond, even the best bond funds will not be safe investments.
In 1981, interest rates had risen to unprecedented levels and then declined for many years, reaching record levels recently. Fixed income generated in the income fund portfolios has become increasingly attractive relative to prevailing rates. The result was: good dividend income and rising share prices for fund owners. You do not need to own the best bond funds. A rising tide lifts all boats.
For many years, the average income fund has outperformed the average equity fund … and unlike equity funds …, they did not let investors suffer heavy losses every few years. . Not surprisingly, millions of investors have become dedicated fans of these funds and still consider them safe investments. Why should you be concerned about owning only the best bond funds in 2015, 2016 and beyond?
Look at interest rates today. You are in luck if you can get a 1% interest income on a 1 year CD or a 3% dividend income from a quality income fund. In 1981, you could get 15% of the CD and an income fund. Today, to generate a dividend income of more than 3% from bond funds, you must either opt for unwanted quality or own a long-term fund; and the average conservative investor does not want to own hedge funds (of mediocre quality) because they are certainly not safe investments. Note: Fixed long-term debt has a higher interest rate because of the risk associated with the time factor.
You have seen how income funds behave when interest rates go down, but I did not tell you this: the best bond funds when interest rates go down are the long – term funds. After all, their portfolios contain higher interest rate debt that is locked in and locked in for at least 20 years. Now, ask yourself, what will happen if interest rates rise?
When rates go up, you look at the other side of the coin. Even the best bond funds will lose money, but long-term funds could be slaughtered. This is not only likely. this is how the world of finance works. When rates peaked in 1981, long-term funds recorded losses of 50%. In other words, even the best bond funds are not really safe investments.
The main concern of investors in 2015 is the "interest rate risk". As rates rise, income fund investors will lose money. Do not be too concerned about quality (but avoid garbage). Be very concerned about the average maturity of a fund's portfolio (long term vs short term). Avoid long-term funds. The best bond funds for 2015 are called medium-term funds and their portfolios hold securities with maturities of 5 to 10 years. Look for one with an average maturity of about 7 years. Although these investments are not really safe, they have much lower interest rate risk than long-term funds.
The best bond funds also have low costs and expenses; and no sales charges called "charges". Most people should hold income funds to give the total balance of their portfolio. In 2015 and beyond, use the best bond funds to keep your overall risk to acceptable levels.
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