Types of bond funds

Zoomer | January 1st, 2006

Which type of bond fund is best for you? Our overview of the four major types available to Canadian investors.

A bond fund represents a managed portfolio of individual bonds and, as with all mutual funds, offers the benefits of diversification and professional management to investors. There are four major types of bond funds available to Canadian investors:

  • Diversified Canadian bond funds are the most common. They invest in a mix of Canadian-dollar-denominated government and/or corporate bonds, with average term-to-maturity of the portfolio, including short-term investments, of greater than three years.
  • Canadian short-term bond funds are limited to bonds with terms of five years or less. For this reason, they’re less susceptible to interest-rate fluctuations and behave most like other types of interest-bearing financial instruments, such as GICs and money-market funds.
  • High-yield bond fund managers deliberately seek out lower-rated bonds that pay higher rates of interest. Of course, the trade-off is that you’re exposed to higher credit-risk than you would get from a fund that buys higher-quality bonds. (T criterion set by the Investment Funds Standards Committee is that 25 per cent of the fund must be invested in issues that are below investment grade for credit worthiness.)
  • Foreign bond funds invest primarily in bonds denominated in a foreign currency. Some of these funds invest in bonds from Canadian issuers that are denominated in foreign currency. So you can get exposure to foreign-currency movements without taking on the investment risk of these foreign markets.