The Role of Bonds
What is the role of bond funds in a portfolio?
Written by Patryk Dyjecinski

IFA and Founder of Clara Wealth

What is the role of bond funds in a portfolio? There are four related, but distinct uses for bond funds. These are:

Diversification
Volatility dampening
Downside protection
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. Investors 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.

Lastly, 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.
Fees paid 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 very low levels.

Here is Vanguard’s video explaining the above:

Please contact me at Clara Wealth Management at contact@clarawealth.co.uk or on 0207 097 4968 if you want to find out more or have any comments.

Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up and you may get back less than you invest.