Bond Funds

Bond funds are simply a pool of bonds selected by professional money managers.  A bond fund that invests in Canadian government bonds and investment-grade bond fund is typically known as a Government of Canada Bond Fund.

Very simply, bond funds holding either Canadian government issues or a combination of government and corporate issues are a collection of individual bonds with varying characteristics. They pay interest to the investor on a regular basis and may also return some capital gains.

Investors may choose from a variety of bond funds:

  • Canadian government bonds.
  • Investment-grade bonds that are a mix of government bonds and corporate bonds.
  • High yield bonds that will hold predominantly corporate issues.
  • Global bonds issued by governments abroad.
  • Real return bonds that are tied to the rate of inflation.

Like all mutual funds, bond funds charge a management fee to the investor. Compared with mutual funds with a higher degree of risk such as balanced funds and equity funds, the MER of bond funds is lower. 

Bond funds provide investors with diversification amongst bonds.  The fund manager selects and continually monitors the bonds held within the portfolio. If one bond within the portfolio underperforms, its negative impact on the entire portfolio is reduced owing to the wide diversification of holdings.

A factor that should be monitored for bond funds is the credit quality of the fund. This will not be a concern with funds that hold primarily Government of Canada bonds. But holdings of corporate bond issues can increase overall risk because corporate bonds have lower credit ratings – and are thus riskier – than government issues.

Mutual funds in Canada are highly regulated, and performance data is easy to acquire. Mutual funds are issued by prospectus and it is important to note that returns are not guaranteed and principal is not guaranteed.  Unit values fluctuate in value and investors may pay commissions to buy and/or redeem and sell mutual funds.  Investors should always read the prospectus prior to making an investment into a mutual fund.

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