Fixed Income Funds

What is a Fixed Income Fund?

Fixed income funds invest mainly in debt securities such as bonds, debentures, mortgages and in other categories including preferred shares and derivatives. These securities are generally publicly traded on fixed income and other capital markets.

Why Invest in a Fixed Income Fund?

Investors expect their fixed income investments to:

• Generate investment income: Many investors depend on their fixed income portfolios to provide regular income in the form of cash distributions. These distributions are made up of net capital gains, interest earned by the underlying holdings of the portfolio and sometimes return of capital. Payments may be on a monthly, quarterly, semi-annual or annual basis.
• Preserve capital: As an asset class, fixed income is generally considered lower risk than equities. That is because fixed income securities are backed by governments, corporations and strong collateral assets. Historically, these securities have demonstrated a measure of stability over time and have a proven track record of protecting capital.
• Increase portfolio diversification: The vast global fixed income universe – larger than the equity universe – offers an enormous variety of debt instruments in multiple markets around the world. Fixed income investments provide a stabilizing counterbalance to equity market swings and dampen volatility to create durable portfolios.

Fixed Income Funds versus Individual Bonds

Investing in fixed income funds has many advantages over owning individual bonds, they include:

• Professional active management: Fixed income funds are managed by dedicated fixed income professional who have the resources and expertise to research and analyze the vast universe of fixed income securities and identify the best opportunities. Trying to research this vast universe will be a daunting task for individual bond investors.
• Access to institutional pricing: Fixed Income Funds are backed by a large pool of assets and typically trade in large volumes, hence they receive more attractive pricing relative to price points accessible to individual bond investors, who trade in much smaller volumes.
• Diversification: Fixed income funds provide exposure to a basket of diversified debt securities. Investors can access this diversified fixed income portfolio with typically a small investment at a low annual cost. An individual bond investor will have to make numerous transactions to create and maintain a well-diversified portfolio which will require a much larger investment and high transaction costs as the number of tractions will stack up over the life of the portfolio.

Types of Fixed Income Funds

Fixed income funds include global, regional (such as emerging market or developed market funds) or individual country portfolios. Within these geographical groupings, portfolios may contain one or more types of investments, including:

Government Bonds

Sovereign

Government bonds are issued by national governments (also known as sovereign bonds) and their agencies. These bonds are typically of the highest quality and are considered low risk as they are backed by the government that issued them.

Municipal

Municipal bonds are issued by local governments and other public authorities. Similar to government bonds, municipal bonds are also considered low risk.

Corporate Credit

Corporate credit includes bonds, debentures and other types of fixed-income instruments issued by corporations in the private sector. While corporate bonds are further along the risk spectrum than government bonds, they offer potentially higher income.

Securitized Loans

Also known as asset-backed securities, securitized loans are backed by some form of collateral. Examples include residential and commercial mortgages, automobile loans and credit cards. These investments generate an income stream from the underlying assets that are passed on to the holders of the asset-backed securities.

Bank Loans

Commercial banks underwrite loans to private corporations, including first lien, second lien, and collateralized loan obligations. Bank loans tend to be higher risk than corporate bonds and potentially offer higher interest rates.

Currencies

To gain exposure to different currencies, these funds typically invest in money market instruments and forward currency contracts denominated in the local currencies of foreign countries.

Featured Franklin Templeton Fixed Income Funds

Canadian Fixed Income Mutual Funds and ETFs

U.S. Fixed Income Mutual Funds and ETFs

Global and International Fixed Income Mutual Funds and ETFs