Q&A: Bond or income fund?
Question: Can you tell me if there are circumstances that make it more suitable to consider holding a bond fund versus an income fund? Is the essential difference between the two that a bond fund would primarily hold bonds and an income fund could hold any range of income producing vehicles? – Janet W.
Gordon Pape answers: Your definition of the basic difference between the two types of funds is correct. However, it is more nuanced that that.
There are many different types of bond funds, some of which are riskier than others. At the high risk end of the spectrum are funds that specialize in long-term bonds and high-yield bonds. Low risk funds include those that focus on short-term issues and mortgages. Most bond funds pay regular distributions so your selection should be based at least in part on risk considerations. Also look at management expense ratios, relative performance compared to others of the same type, and management tenure.
Income funds usually offer balanced portfolios. But the asset mix can vary considerably with some funds emphasizing fixed-income securities while others are heavily weighted to stocks, REITs, etc. Obviously, the higher the equity component the greater the risk so be sure you understand exactly what you are buying.
As a general rule, bond funds, especially of the low-risk variety, are better choices for those who rate capital preservation as a top priority. An equity-weighted income fund would be the selection for those looking to maximize profit potential.