Bond Mutual Funds
Many bond mutual funds built great performance records in the last decade. This, though, was a function of the trend in interest rates; when rates fall, bond prices go up. Interest rates are low right now, but could move upward over the next few years in response to fears of growing inflation. This is another way of saying that bond prices could fall.
When bonds yielded 10%, perhaps it made some sense to buy bond mutual funds and pay a yearly MER of, say, 2%. Now that bond yields are down closer to 4%, it makes a lot less sense.
The bond market is highly efficient and we doubt that any bond fund can add enough value to offset its management fees. But in addition, investing in a bond fund exposes you to the risk that the manager will gamble in the bond market and lose money.
Bonds are attractive for predictable income, and as an offset to the stocks in your portfolio. But it's cheaper to buy bonds directly than to do so through a bond fund. If you want capital gains, buy stocks or stock-market mutual funds.
The Bank of Canada is holding interest rates steady, even though the current 3.3% inflation rate is well above the bank’s target of 2%. The bank doesn’t want to derail Canada’s economic recovery with higher rates, or push the dollar any higher.
Even so, the long-term outlook is for higher interest rates. That’s especially so in light of the potential for …read more »
With the unpredictability of the stock market and mutual funds’ performance, it’s getting harder to make the right investment choices. However, as with stock trading, mutual fund investing should be done with the long term in mind. You need to find a solid fund and stick with it.
There are, of course, thousands of choices available at any time. Most funds …read more »
Bond funds are mutual funds that specifically invest in different government and corporate bond offerings.
Many bond funds posted strong results in the past, with yields of 6%, 8% or 10% over five or 10 years. This, though, was a function of the trend in interest rates; at the start of those periods, the funds were buying bonds with …read more »
