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Bond Funds

What’s the Difference Between Fixed Income and Bond Funds?

Bob Ciura Oct 06, 2015

This article will discuss some of the differences between fixed income and bonds.

Bonds and Other Fixed Income Securities

However, there are many other types of fixed income securities. For example, sometimes companies will issue preferred shares. These securities are a hybrid of bonds and equities, in that they receive distributions before equity holders but after bondholders. Preferred stocks carry ownership rights like equities, but typically do not offer voting rights. A preferred stock fund that investors can purchase is the Nuveen Preferred Securities Fund (NPSAX).

Alternatively, there are other fixed income securities available. Some mutual funds contain mortgage-backed securities or bank loans. Examples of these include the Fidelity Mortgage Securities Fund (FMSFX) or the Fidelity Floating Rate High Income Fund (FFRHX). The FMSFX fund invests at least 80% of assets in investment-grade mortgage-related securities. This fund currently yields 2.1%. Meanwhile, the FFRHX fund invests at least 80% of assets in floating rate loans, which are often lower-quality debt securities, and other floating rate debt securities.

Consider the Risks Before Investing

Another risk to be aware of is default risk. Default risk is the risk of an issuer defaulting on its contractual agreement, and failing to repay principal. Different fixed income securities carry varying levels of default risk. Higher-investment grade corporate bonds, such as those with ‘AAA’ credit ratings, tend to have very low default risk. On the other hand, floating rate loans tend to be lower-quality bonds with higher default risk. Ultimately, investors should determine their own particular needs and risk tolerances before investing.

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