Corporate bonds

Diversifying your portfolio with a mix of bonds

How do bond funds work? Like stock funds, a bond fund is a bundle of bonds. Your cash is pooled with your fellow investors’ money and used to buy a bunch of different bonds, aiming for a certain return and risk level.

There are two main kinds of bond funds: actively managed funds, and passive “index- tracking” funds. The latter is the simplest and cheapest – they’ll track the performance of the bond market, with you able to choose whether you want to focus on global bonds, a specific country, or a particular risk level. As you can probably guess by now, bond ETFs is what you’ll find if our Wealthyhood app! 🥰

As the name implies, an actively managed fund has a person running it. This fund manager will decide what bonds to buy in an attempt to outdo the wider market. Full disclosure: it’s pretty hard for them to do that, but there’ll always be the occasional manager who can beat the market.

Because there’s no such thing as a free lunch, you’ll be paying for the privilege – actively managed funds tend to have fees 💰 up to five times higher than passive funds, while the majority of them rarely beat the performance of their passive cousins after fees.

Why do this instead of directly investing in bonds?

Investing in a bond fund or ETF is a much easier 🏝️ way to build a diverse bond portfolio than doing it all yourself because you’re outsourcing the research work to someone else. Having some help can be a significant advantage, especially if you’re looking to invest in markets you’re not super clued up on.

A big disadvantage of a bond fund, is that you don’t actually own the bonds. When you directly own a bond, you have a certain level of security. Unless a bond defaults, you will be paid a predetermined amount on the bond’s maturity date.

However, because the fund is continuously trading bonds rather than holding onto them, you don’t have that security of an eventual repayment. At this point, we need to remind you - as with every investment, your capital is at risk.

When you choose a bond fund or ETF, decide your risk ⚖️ tolerance, and what area to invest in – whether safer US bonds or wild high-yield emerging market bonds. You can find a few funds which invest in those areas online. To decide between these, have a look at the fees, the strategy, and track record of both the fund and the fund managers. Hopefully, you’ll find something that chimes with what you’re looking for – then you’re good to go.

Bonds don’t have to be complicated. With your newfound knowledge, a whole new asset category has opened up to you, and as we’ve explored, they can be a great addition to your portfolio. Good luck with your new investments: yield for no one.

Now, test your knowledge with a quiz.

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Never forget that when you invest, your capital is at risk. This learning guide is for information purposes only and is not intended as investment advice. Although this material is intended to be educational, it may promote the services provided by Wealthyhood.