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Debt instruments (bond) fund

A debt instruments fund invests at least 80% of its portfolio in fixed-income securities such as government bonds, treasury bills and corporate bonds. Bond funds aim to earn interest income and gains from bond price moves.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • They are classed as short, medium and long term; the longer the maturity the higher the sensitivity to rate changes (duration).
  • Long-term bond funds are favoured at the start of a rate-cutting cycle, short-term and money market funds during a hiking cycle.
  • "fixed income" does not mean the fund delivers a fixed return; it can lose money when rates rise.

Formula / calculation

Fund return = Coupon (interest) income + Bond price change − Management fee. When rates fall bond prices rise and the fund gains; when rates rise the opposite happens. The price is usually announced same day or T+1.

Interpretation

Funds weighted in corporate bonds also carry credit risk.

Long-term bond funds are favoured at the start of a rate-cutting cycle, short-term and money market funds during a hiking cycle. The benchmark is usually a KYD government bond index.

Pitfalls

"fixed income" does not mean the fund delivers a fixed return; it can lose money when rates rise. Corporate bonds carry issuer default risk. Eurobond funds additionally carry FX risk.

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Frequently asked questions

A debt instruments fund invests at least 80% of its portfolio in fixed-income securities such as government bonds, treasury bills and corporate bonds.

Fund return = Coupon (interest) income + Bond price change − Management fee. When rates fall bond prices rise and the fund gains; when rates rise the opposite happens. The price is usually announced same day or T+1.

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