The role of bond funds

This animated tutorial looks at the role that bond funds could play in investment portfolios and the importance of controlling costs to investment success.


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So, what’s the role of bond funds in client portfolios? Vanguard believes in four related, but distinct uses for bond funds. These are;

Diversification, volatility dampening, downside protection and income.

Lets look at diversification. Bond funds help diversify a portfolio in two ways.

First, bond funds contain many different bonds, especially a broad-based bond fund. This helps protect the portfolio from problems in any one bond or issuer.

Secondly, they offer diversification away from equities. They often, but not always, move in a different direction to equities.

Bonds can also help dampen volatility in a portfolio. Bonds tend to produce less growth than equities over the long term, but they also tend to have fewer dramatic falls.

When mixed with equities, bonds can make the overall portfolio less volatile.

This is important in providing downside risk protection. Clients who have a low tolerance for risk can be tempted to abandon an investment strategy if it falls too drastically during inevitable periods of equity market turmoil. This can damage their investment prospects as a move like this may come at exactly the wrong time, such as the bottom of the market.

Diversified bond funds can provide a type of safety net, keeping a portfolio from falling too far when equity markets decline.

And of course, bond funds provide interest payments. These offer an alternative source of returns, balancing other assets, as well as an income for clients that require it.

Of course all of these benefits have their own costs in the form of fund manager charges.

Every penny paid in charges to the manager of a bond fund comes out of the investor’s return so it makes sense to try to minimise these costs as much as possible.

This is true of all investments, but it’s even more critical for bond funds where returns are historically more muted.

So, when picking bond funds, Vanguard believes that cost should be a critical component of the decision.

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

This video was produced by Vanguard Asset Management, Ltd. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

If this is to be used on third party websites for an audience of professional investors as the submission suggests I would also include the for professional investors disclaimer at the top.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2018 Vanguard Asset Management, Limited. All rights reserved.