How bond funds are categorized

Seven categories differentiate funds by the types of risks they take.

Michael Ryval 16 September, 2014 | 6:00PM

Despite their seemingly simple category names, bond funds are a complex group. They are divided into seven categories, each bearing different characteristics that investors have to understand in order to make informed decisions.

"The categories are there to keep those funds that have the same characteristics together, although the mandates are very different from one another," says Randy LeClair, managing director and fixed income strategist at Toronto- based Manulife Asset Management Inc. "There is some overlap, but there are characteristics that differentiate them. They can differ by term risk, credit risk, currency risk and duration."

Unique to bond funds, duration is measured in terms of years and reflects the behaviour of fixed income funds as they move further up the ladder of interest-rate risk. Moreover, since bond prices move in the opposite direction of yields, a fund that has a 5-year duration, for example, will gain 5%, should bond yields fall by one percentage point. Conversely, if yields rise by one percentage point the fund will lose 5%.

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Michael Ryval

Michael Ryval