Fixed interest funds

Fixed interest, also known as bonds, can offer a relatively secure and predictable income for investors.

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What are fixed interest securities (bonds)?

Fixed interest securities, also known as bonds, are in effect loans extended to the bond issuer. Bonds can be issued by governments or companies:

  • Government bonds are generally issued to fund public spending on projects such as new roads and schools
  • A company may issue corporate bonds as a way of financing new business opportunities

How they work

Bond investors receive an income through regular interest payments from the bond issuer (the ‘coupon’). The coupon amount is fixed when the bond is first issued.

On the day that the bond expires, known as the ‘maturity’ date, the bond holder receives back their capital investment. However, investors do not have to hold on to a bond until the redemption date. Just as a company’s shares can be bought and sold on the stockmarket, bonds can also be traded throughout their lifetime.

The original price of the bond, also known as ‘face value’ or ‘par value’, is the amount that will be returned to the bondholder when the bond matures. Between the date of issue and the maturity date, the price will change as the bond is bought and sold on the open market.

Why invest in a bond fund?

Bonds have the potential to provide relatively stable income and can be particularly suitable for investors seeking regular income from their investments. Like all investments however, bonds are not entirely risk-free. For example, if the issuer of a bond runs into financial difficulties and fails to meet its obligations, it could default (when a bond issuer does not maintain the regular interest payments or repay the principal sum at maturity).

In a bond fund, investors’ money is pooled together and invested in a wide range of individual bonds with different interest rates and maturity dates according to the investment parameters of the fund. This diversification helps to reduce the risk of relying on a single company or government.

The income received from an investment in a fund is called the ‘yield’. For bond funds, the ‘distribution yield’ gives an indication of the amount of income that is expected to be distributed over the next 12 months, expressed as a percentage of the current fund price.

The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

M&G bond funds

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