Bonds Explained: Part II: Bonds vs. Debt Funds

This is in continuation with the Bond vs FD post. Please refer to it for some technical jargons.

Contrary to popular perception, one can actually lose money in a guild fund. When the interest rate goes up, the bond becomes less valuable. (as bonds offering higher interest rate are available in the market) For more details please refer to Macaulay Duration (http://www.investopedia.com/terms/m/macaulayduration.asp) Also fund managers are required by law to disclose their portfolio and they usually don’t churn their portfolio frequently enough. So if I were you, instead of investing in a guild fund, I would invest directly into the individuals bonds and save on the Fund Management fee, exit fees etc.

Why my financial planner never told me about them. Simple look at who is paying them…. Usually it is the firm selling the financial products. So if you invest in a 15 year bond then he/she can be assured that you won’t touch that money for the next 15 years. So there goes all the commission that could be made when you switched from one fund to another every 6 months.

PS: There is a slight difference in tax implication in various instruments, but since I don’t have an official degree in Tax, I would advise to consult your tax planner.

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