Types of Fixed-Income Funds
Fixed-income funds are investment vehicles designed to provide regular income to investors. They vary in their characteristics and levels of risk, offering different opportunities and challenges. Here’s an overview of the primary types of fixed-income funds:
- Government Funds Government funds invest primarily in bonds issued by sovereign governments and government agencies. This category includes bonds from entities such as Fannie Mae, Freddie Mac, and international organizations like the World Bank and the International Monetary Fund. These investments are generally considered low-risk due to the backing of government entities, though they typically offer lower yields compared to other types of fixed-income securities.
- Corporate Credit Funds Corporate credit funds focus on bonds, preferred stocks, and other fixed-income instruments issued by private corporations. These funds tend to carry higher risk compared to government bonds due to the credit risk associated with individual issuers. However, they may offer higher income potential as compensation for the increased risk. Investors should carefully assess the creditworthiness of the corporations whose debt they are investing in.
- Bank Loan Funds Bank loan funds invest in loans to private corporations that are underwritten by commercial banks. These loans can include first lien, second lien, and collateralized loan obligations. Typically, bank loans are riskier than corporate bonds but may provide higher interest rates to compensate for the elevated risk. They are often used by investors seeking higher yields.