Geographical allocation is one of the ways bond funds are classified. Another common method of categorising bond funds is through their risk levels.

Asian bond funds are restricted to debt issues in the Asian region. Similar to global bonds, their investment universe may include both sovereign and corporate bonds. Due to a relatively smaller universe, most Asian bond funds will hold a bit of both. Some of these funds may also have restrictions on the currency denominations of these Asian fixed income securities.

Hard currency issues refer to securities denominated in currencies that are generally accepted to possess long-term stability and deemed to be a suitable store of value. Examples include the US dollar and euro. On the contrary, local currency issues refer to securities denominated in the currency of the country where the issuer is based. In the context of Asian bonds, local currency refer to the currencies of these Asian countries such as the Korean won and Thai baht.

Due to their narrower geographical focus and possible exposure to both hard and local currency denominated securities, Asian bond funds are generally considered to be riskier than global bond funds.

Keeping in mind the possible currency exposure, we prefer the SGD-hedged share classes of these funds if available.

Investors may gain a deeper level of understanding by referring to the fund reviews (second tab on their online factsheets) produced by the WISE team.

In short, global bond funds do not have any restrictions on the geographical regions they may invest in. This gives them the ability to diversify globally. With lower concentration risk, these funds are relatively safer than regional or sub-regional bond funds.

Within global bond funds, there may be some with restrictions on the types of bonds they can invest in. For example, certain global bond funds can only invest in sovereign bonds while others may focus only on corporate bonds. While certain constraints may be spelt out in the funds’ investment mandates, not all style leanings will be explicitly stated.

Investors may gain a deeper level of understanding by referring to the fund reviews (second tab on their online factsheets) produced by the WISE team.

Singapore bond funds are largely invested in the debt of issuers which are based in Singapore. Most of these issues are denominated in Singapore dollar which safeguards local investors against the exposure to currency risks. While some of these funds some may invest in foreign issues, such allocation are usually limited by constraints set within its mandate.

These issuers are usually the Singapore Government, statutory boards, government-linked entities or large mature companies with strong credit ratings. As Singapore Government issuance form a large portion of the investible universe, most Singapore bond funds have a fair exposure to the assumed risk-free securities.

Hence these funds can offer much better returns than bank savings at a slightly higher level of risk.

Investors may gain a deeper level of understanding by referring to the fund reviews (second tab of their online factsheets) produced by the WISE team.

The main objective of most money market funds is to preserve capital and maintain liquidity while achieving a rate of return greater than the short-term savings rate in Singapore. This is usually achieved by investing in short-term, higher quality bonds with maturities of less than a year, and in cash equivalent products such as timed deposits that mature within three months.

In addition, the Monetary Authority of Singapore has also laid down guidelines on what a money market fund may invest in. In short, at least 90% of a money market fund’s portfolio must be invested in “high-quality money market instruments” that have a maturity term shorter than one year. Essentially, this may be thought of as a portfolio of short-term fixed deposits.

Investors may gain a deeper level of understanding by referring to the fund reviews (second tab of their online factsheets) produced by the WISE team.

As its name implies, emerging market bond funds invest in debt issued by both sovereign and corporate in the emerging market regions. This includes Asian, Latin American, Emerging European, Middle-Eastern and African countries.

In general, emerging markets regions are perceived to be less politically stable and have less developed credit markets. As such, debt issuers usually have to offer higher yields to compensate investors for these additional risks. Similar to high yield bonds, emerging market bond funds are also considered as the riskier segments of fixed income space.

Investors may gain a deeper level of understanding by referring to the fund reviews (second tab of their online factsheets) produced by the WISE team.

High yield bond funds, as their name suggests, invest predominantly in the higher-yielding credit space. In general, the majority of the funds’ portfolios will be invested in non-investment grade debt, otherwise known as high yield bonds or junk bonds.

High yield funds belong to the riskier segment of the fixed income space, and thus compensate investors by offering higher returns. While an investment in a single high yield bond may be considered very high risk since a default in the bond’s issuer may result in loss of capital, a portfolio of such bonds provides diversification benefits and reduces the amount an investor will stand to lose, thereby reducing the risk associated with a high yield bond fund. Hence, such funds will be suitable for investors who are willing to exchange some safety margin for higher returns.

Investors may gain a deeper level of understanding by referring to the fund reviews (second tab of their online factsheets) produced by the WISE team.

In general, short duration funds invest in securities that mature in less than three years. They are similar to money market funds in that both groups of funds belong to the safer fixed income segment. However, unlike money market funds, short duration funds have more flexibility in their investment strategies.

Due to their focus on short duration securities, these funds tend to be less impacted by rising interest rates. As a result, these funds are more defensive and tend to deliver steady positive returns.

Investors may gain a deeper level of understanding by referring to the fund reviews (second tab of their online factsheets) produced by the WISE team.

Savings and fixed deposits are the safest forms of investments in Singapore. Their primary risk revolves around the solvency of the bank in which their monies are deposited. However, this safety comes with a hefty price. Since the 1970s, interest rates on savings have declined rapidly from more than 7% per annum to less than 0.2% per annum currently. Due to the large difference between inflation rates and interest rates on savings, purchasing power is slowly being eroded.

Simply put, sovereign bonds refer to debt securities issued by governments, rather than corporate. Common examples include US Treasures, UK Gilts, German Bunds and Singapore government bonds.

Corporate bonds are debt securities issued by companies rather than governments and run the gamut of fixed income risk spectrum. The bonds’ credit ratings may serve as an indicator of the bonds’ quality or credit risk – how likely the issuer of each debt issuance may fail to repay its debt obligations.

Though the effect of credit risk is diminished in bond funds due to a higher level of diversification offered by the fund structure, the credit rating of the underlying corporate bonds will have a large influence on the risk and return profiles of the funds.

Investment and non-investment grade is a generic grouping of credit ratings. While international rating agencies have various guidelines in their assessment of each issuer’s risk of default, these ratings can be largely classified as either investment grade or non-investment grade.

Issuers of investment grade bonds are deemed by rating agencies to be capable of meeting their debt obligations, and so have relatively low credit risk. As a result of their high probability of meeting future payments, their yields tend to be comparatively low.

On the other hand, issuers of non-investment grade bonds are considered by these rating agencies to have a higher probability of default. To compensate for the higher perceived credit risk, their yields are generally higher.

All funds available on WISE@fundsupermart.com are ascribed a risk rating which takes into account its bond category, investment objective and strategy, as well as portfolio holdings. The risk ratings range from 0 to 5 for bond funds, with 0 being the safest. Investors may use the risk rating on the fund as a guide when selecting a bond fund that is aligned with their risk appetites.

For the full fundsupermart.com risk spectrum, click here.

Duration is a measure of interest rate risk – how sensitive a bond is to changing interest rates. In addition, a bond's price is negatively correlated to interest rates. In general, when interest rate fall (or rise) by a certain amount, a bond's price will rise (or fall) by the same amount, multiplied by its duration. For example, when interest rate falls by 1%, the price of a bond with a duration of 5 years will increase by 5%.

Hence, all things equal, the value of a longer-dated bond will decrease by a larger percentage compared to a short duration bond when interest rates increase. As a result, short duration bond funds tend to be more defensive, especially during an environment of rising interest rates. In contrast, bond funds with higher weighted durations are more likely to outperform when interest rates are declining.

Bonds are often discussed hand in hand with interest rates. While interest rates do not impact bonds directly, the prevailing interest rate environment affects the amount of yield or return investors demand when they invest in bonds.

As most government has the ability to print money to meet their debt obligations, their debt is generally regarded as risk-free. Therefore, when companies issue debt in that currency, they usually have to borrow at a premium over the government’s interest rate. This difference is commonly known as “spread”, and is commonly used as a measure of a bond’s attractiveness (the extra yield to compensate investor for credit risk).

Hence, the interest rate at which a government issues debt sets the base of fixed income yield issued in that respective currency. This is why interest rate is commonly used to describe bond yield, which has a direct relation.

Bond funds are generally divided according to certain features such as duration and risk levels. Another common categorisation method involves the type of issues the funds invest in, whether the bonds are issued by governments or companies.

All bond funds on WISE@fundsupermart.com are divided into six broad categories as follows:

1) Money market and Short duration
2) Singapore bonds
3) Global bonds
4) Asian bonds
5) High yield bonds
6) Emerging market debt

There are two main types of risks when investing in fixed income securities – credit risk and interest rate risk. As with all investments, returns are usually positively correlated with risk and this also holds true with regards to fixed income investing.

Investing in fixed income securities may also be exposed to foreign exchange risk, though this is usually actively managed by the fund manager of fixed income funds, usually against a certain currency (commonly known as base or reference currency). Local investors who wish to reduce foreign exchange risk are advised to buy SGD-Focus (fund manager manages the fund from an SGD perspective) fixed income funds or funds with SGD-Hedged share classes.

Interest rate risk highlights the effect of changing interest rates on bond values. Bond prices and interest rates are negatively correlated; when interest rates decrease, bond prices increase.

Interest rate risk may be measured by duration. The higher the duration of a particular bond, the more sensitive it is to changes in interest rates. In other words, in response to the same fluctuation in interest rates, a longer-dated bond will exhibit a larger change in value compared to its short duration counterpart.

While this is not necessarily a bad thing since bond funds with longer durations will outperform when interest rates decrease, these funds tend to demonstrate more volatile return profiles.

Credit risk refers to the probability that the issuer of a bond will not be able to fulfil its debt obligations and thus will not be able to repay in full the amounts due to its bond holders.

However, due to the very nature of funds which invest in a portfolio of bonds, the higher level of diversification offered by bond funds reduces the impact of credit risk. By spreading investment across many issuers, the maximum loss a fund may incur during a default will be the respective portion invested with the specific issuer. Hence, diversification is an important consideration to fixed income investing and is most efficiently done via unit trust.

Most bond funds will typically invest in 30 to 100 debt securities, from a variety of issuers. Internal risk controls employed by the fund managers, such as limiting the exposure the fund may have to a single issue, further reduces the effect of credit risk from the perspective of a bond fund.

Put simply, bonds are a form of lending where investors are the lenders. When an investor buys a bond, he effectively lends money to the issuer, which can be a company (corporate bond) or the government of a country (sovereign bond).

As with most lending, the lenders expect interest (in case of bonds, known as coupon) and repayment (in case of bonds, known as par value). As the terms of repayment is fixed and known, the term “fixed income” is commonly used to describe bonds.

Yield-to-maturity refers to the annualised return an investor is expected to earn should he purchase a bond at its current price and holds it to its maturity, should the interest rate environment remain unchanged.

From the perspective of a bond fund, a higher yield-to-maturity on a fund suggests higher potential returns when compared against another fund with a lower yield-to-maturity, keeping all other variables constant.

	Exchange Traded Bonds	Bonds Funds
Minimum investment amount	From $2,000	From $100
Daily liquidity	Yes	Yes
Diversification from single investment	No	Yes
Investment classes that correpond to different risk appettites	No	Yes
Access to foreign issues	No	Yes

In short, from as little as $100, an investor can get instant access to a portfolio of fixed income issues via a bond fund. On top of that, the investment will be diversified across 30 to 100 different issuers (or borrowers), hence reducing the risk of default. With daily liquidity and benefits that are far superior than that of retail bonds, bond funds are good complements to savings and fixed deposits. This is especially so now that all WISE funds are available for investment at zero sales charge.