When interest rates go up, the value of bonds will go down. Under such a condition, core bond funds are available in order to help people generate more income while minimizing the cost. The products are diversified and broadly exposed to the investment-grade area of the bond market, offering participation in several market segments. Besides, the products also offer short, intermediate, and long maturities in each area.
Core bond funds can be either active or passive. If the funds are active, the manager will frequently switch the makeup of the portfolio to avoid risk or grasp opportunities. If the funds are passive, an index will be tracked. While an active manager tries to obtain better results than those in the average market, passive funds just tend to match the return of the index.
However, core bond funds issued by different companies may look different. Some funds can take a special approach incorporating high-yield bonds or other investments that are not held in the investment-great indices while others cannot. This means a core bond fund may not completely satisfy investors’ goals.
Besides, although core bond funds are diversified, they may not offer the level of diversification so high as many people expect. The fact is that most core funds do not hold weightings in international and emerging market segments. Also, core bond funds may face greater interest rate risk than well-diversified portfolios.
How to invest in core bond funds?
Core bond funds have two major types: core bond mutual funds and exchange-traded funds (ETFs). You can buy mutual funds via the company or a broker and buy ETFs with a brokerage account.
When you are deciding which type of fund to invest in, you should consider the management fees of the fund. It has been proved that management fees cast a great influence on long-term profits. Sometimes, however, high management fees may not guarantee good fund performance.