Think bond funds

Everyone hates bond funds when stock markets are on the rise so between 2003 and
2007 they were out of favour. People were kicking them out of their portfolios
and replacing them with high-performance Canadian equity funds as greed ruled
investor sentiment.

That strategy was great while it lasted but the party ended in June after the
TSX hit an all-time high. Very few equity funds have made any headway since.
Bond funds haven’t been setting any records either but at least they’ve managed
to generate modest profits at a time when stocks are being kicked in the teeth.
I’ve been looking over the bond fund universe recently and there are lots of
good ones from which to choose. I suggest focusing on those that offer a diversified
portfolio and relatively low MERs. High-yield bond funds are more risky during
periods of economic slowdowns because of credit risk concerns.

Here are two bond funds that are worthy of your consideration. Ask a financial
advisor if they’re the right fit for your needs.

RBC Canadian Bond Index Fund. This is a great place to have
some money right now. This fund has never lost money over a calendar year since
it was launched in mid-2000 and has consistently been a first or second quartile
performer. There are no sales commissions, the MER is a very low 0.63 per cent,
and the minimum initial investment is only $1,000. The fund, which is overseen
by Suzanne Michele Gaynor of RBC Asset Management, has posted above-average
performance numbers for all time frames out to five years. Over the latest 12-month
period, investors saw their assets grow by 8.4 per cent, well above average
for the Canadian fixed income category. How many of the funds in your portfolio
did as well?

The fund is designed to track the performance of the RBC DS Government of Canada
Bond Market Index which means that, by definition, it invests in only top-grade
securities. Distributions are paid quarterly and have been running between 8c
and 10c a unit in the past year. All-in-all, this is a first-rate choice.

Beutel Goodman Income Fund. I have great respect for the Beutel
Goodman funds. They are conservatively managed, have low MERs, and in most cases
produce above-average returns. This fund is no exception. It has been in business
since 1990 and rarely disappoints investors. The performance record is one of
most consistent in the category, in fact it has ranked in the top quartile in
every calendar year since 2000. The investments are top-quality with 56 per
cent of the portfolio held in federal and provincial government bonds and the
rest in corporate issue. Returns are outstanding for a fund of this type, with
a five-year average annual gain of 5.3 per cent to Aug. 31. Over the latest
12-month period, the fund added 7.6 per cent. You’ll need $10,000 to buy a stake
in this one.

Adapted from an article that originally appeared in Mutual Funds Update,
a monthly newsletter that provides advice on fund selection and strategies.
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