Okay, so which fund?

Q – You suggest a typical investor is better off investing in bond funds, rather than individual bonds. Can you suggest a buy-and-hold bond fund? One that buys quality government bonds and holds on to them, rather than constantly trying to guess where interest rates are going and buying and selling. Such a bond fund would never lose money, ever, but would stagger its purchases (as I do with my GICs) so that every year a percentage of its bond holdings would mature and be replaced at the going rate. Again, is there such a fund? Or does this not make good financial sense? I’m just frustrated at buying bond funds that produce annual returns that are below the five-year GIC rate. – C.O.


A – I don’t know of any fund that operates in exactly the way you describe. However, I do know of several good bond funds that rarely, if ever, have a down year.


There are two ways to approach bond fund investing. One is to buy units in an index fund, which would come closest to the type of fund you describe. Examples are the CIBC Canadian Short-Term Bond Index Fund and the TD Canadian Bond Index Fund. The CIBC funhas not lost money in any calendar year back to 1996. The TD fund had a small loss of about 2% in 1999. Both funds handily outperformed the average five-year GIC over the period to Jan. 31.


The other option is to choose an actively-managed fund with a low MER (management expense ratio). These are certainly not buy-and-hold funds, but a good manager can add a lot of value to a bond fund’s return. The Phillips, Hager & North Bond Fund receives a top rating in my 2003 Buyer’s Guide to Mutual Funds, but you need $25,000 to get in. The TD Canadian Bond Fund is a less pricey alternative. It shows a five-year average annual compound rate of return of 6.5% to Jan. 31. The average five-year GIC returned 4.6% over the same period.


We will be dealing with bond funds, as well as a wide range of other income-producing securities, in my new newsletter, The Income Investor, which will launch in April. For details on our 40% off charter member special, go to http://www.buildingwealth.ca/promotion/50plusproducts.htm – G.P.