Bond Portfolio
Defensive characteristic
Bonds are referred to as “fixed income securities” due to the fact that most are able to pay a “fixed” income according to a pre-determined schedule.
In addition, bond investments offer the benefit of diversification. The risk equities are exposed to, because of market volatility, is higher than bonds. However, the performance of bond and equity markets is usually uncorrelated. If an investor holds both equities and bonds in his portfolio, during market downturn, the stability of bond investments can provide a buffer against potential loss from equities.
Bonds can also act as a hedge against economic slowdown. When growth is losing steam, corporate earnings and equity income are bound to be weaker. Investing in “fixed income securities” can ensure a fixed income. In a deflationary environment, income from bond investments can be even more attractive as the fixed income does not change even when prices fall.
Bond funds as the cornerstone of investment portfolios
In terms of asset allocation, investors should consider making bonds with defensive characteristics the “cornerstone” of the portfolio. A multi bond fund will be suitable for investors looking for an investment tool that covers a wide range of bonds. A diversified bond portfolio invests in various types of bonds and the manager has the flexibility to adjust the weightings in tune with changing market conditions which allows the fund to capture gains under all circumstances.
“Do not put all eggs in one basket” – an appropriate approach is to have a multi bond fund as the cornerstone of an investment portfolio.