This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
MONEY COMMENT
By
Bonds are extremely popular with private investors at the moment, accounting for 20-25% of new fund sales in recent months. Although bond funds are likely to be less volatile than their short-tempered equity siblings, you still need to be on your guard. For starters, a lot of their good performance in the last two decades has been caused by the steady decline in interest rates, which may not continue and could even reverse. One of the main dangers with bond funds is concentrating too much on the headline yield (which is all too easy because these are the figures plastered in six-foot high letters on billboards up and down the country). Unlike a savings account, where the higher the rate of interest, the better, bond funds with higher yields are usually more risky. It's no good enjoying a high rate of income only to see your capital being eroded away. So it's important to understand what sort of bonds your fund invests in so you appreciate where it sits on the risk spectrum. But there's another little trap to watch out for as well, as was pointed yesterday by James Foster of ISIS Asset Management (LSE: ISIS). He highlighted the increasing trend of bond funds that charged their annual management fees against the capital value of the fund rather than against income. In fact, it's estimated around half of all bond funds use this method, allowing them to display higher headline yields and making their funds appear even more attractive at a time when interest rates are at historic lows. One way you can sidestep this problem is by looking at the redemption yield of a fund, which measures its total return and not just the income element. Foster says more and more funds are showing an increasing difference between their headline and redemption yields, suggesting that, several years down the track, there could well be some disgruntled bond investors around. More: Bond Funds Are Riskier Than You Think | Investing In Corporate Bonds | Guide To Gilts | Discussion board