AxTenk Blog

 Fixed-income funds invest in bonds and other fixed-income instruments, such as mortgage-backed securities. There is a wide array of different types of fixed-income funds, ranging from funds that invest in high-grade debt, such as Treasury notes and bonds, to those that invest in the debt of highly indebted companies (junk-bond funds). Obviously, the risk to your principal hinges on what type of securities your fund buys. However, all fixed-income funds face interest-rate risk. In a nutshell, if interest rates rise, the value of your old, relatively low-yielding bonds will fall. If interest rates drop, the value of your old, relatively high-yielding bonds will rise. But when you buy individual bonds, you’re relatively blind to the changes in market direction—no one calls you to tell you that your bond is worth less or more than what you paid on a day-to-day basis. Mutual funds report their net asset values every single day. So if you’ve got a paper loss on your bond fund, you’ll know it. These paper losses should not negatively affect the income you receive, so if you are investing mainly for income, you shouldn’t let them bother you. But expect to see them, because interest rates do change and will affect the fund’s net asset values.
Risk: Moderate
Potential for capital appreciation: Low to moderate
Potential for current income: High

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