Fixed income is often sold as the calm, safe corner of a portfolio: fewer surprises, “more predictable” income… But it’s not a zero‑risk button. A bond fund can go down—sometimes a lot—if you don’t understand what you’re buying.
To invest with clarity, three concepts put you ahead of most people: YTM, duration, and risk. Let’s focus on what matters, without formulas and without fluff.
1) YTM: a useful number… if you read it right
YTM (yield to maturity) is “return to maturity”. In plain English:
- It’s an estimate of what the bond portfolio could deliver if things stay reasonably normal.
- It’s not a promise. It’s a snapshot with assumptions (and assumptions matter).
If a fund shows YTM 4.0% and total costs are 0.6%, your starting point is closer to ~3.4% (before taxes). In fixed income, every tenth of a percent matters.
Why can YTM “miss” even if nobody is trying to trick you?
- Costs: fees and expenses reduce net returns.
- Credit: if defaults rise (or fear of defaults rises), prices can fall.
- Turnover: funds buy and sell; it’s not pure “buy and hold”.
- Market repricing: even without defaults, if the market demands higher yields, prices drop.
If you see a very high YTM, automatically ask: what am I being paid for? Usually it’s more credit risk (weaker issuers) or more sensitivity (higher duration).
2) Duration: the remote control for rate risk
Duration tells you how much the fund might move when interest rates change. As a practical compass:
- Duration 2 \u2192 if rates rise 1%, the fund could fall by ~2% (roughly).
- Duration 7 \u2192 the same move could mean ~7% down (roughly).
Is lower duration always better? Depends on your goal:
- If you want stability or your horizon is short \u2192 shorter duration often fits.
- If you can tolerate more movement and your horizon is longer \u2192 higher duration can make sense (especially if rates fall).
Funds don’t move only because of “rates”. They also move because of spreads (credit risk premium). In stressful markets, a fund can fall even if the central bank does nothing.
3) What to actually check in a bond fund
Forget the long fund name and last year’s return. To choose well, focus on this:
A) Credit quality (who owes you the money?)
- Is it mostly government bonds, corporates, or a mix?
- How much high yield (lower‑quality bonds) is inside?
- Is the average quality around A/BBB, or drifting into BB/B?
B) Duration (how sensitive are you to rates?)
- Short duration: less volatility, usually fewer surprises.
- Long duration: more sensitivity (for better or worse).
C) Costs (in fixed income, every tenth matters)
- A 1% fee in fixed income isn’t “small”. It can eat a big chunk of expected return.
- Better to pay for something clear (a differentiated strategy) than pay by inertia.
D) The bonus checks almost nobody does (but should)
- Currency: if the fund holds USD and you invest in EUR, is it hedged or are you taking FX risk?
- Concentration: be careful with funds heavily loaded in one country/sector/issuer.
- Fund type: money market / ultra‑short / short / aggregate / high yield… “fixed income” is a huge umbrella.
4) Common mistakes (and how to avoid them)
- “Fixed income = zero risk” \u2192 false. There’s rate risk, credit risk, liquidity risk and currency risk.
- Looking only at YTM \u2192 without duration and credit quality, it’s incomplete.
- Ignoring costs \u2192 fees matter a lot in fixed income.
- Not understanding duration \u2192 you can carry huge rate exposure without realizing it.
5) Keep it simple: 3 filters before you invest
Before buying any bond fund, run this mini test:
- Quality: what’s the credit quality (and how much high yield)?
- Duration: what’s the duration and does it fit your horizon?
- Costs: what do you pay in total fees?
Higher yield almost always means higher risk. If you can’t identify the risk, slow down and understand it first.
If you want, send me the name/ISIN (or 2–3 options) plus your horizon, and I’ll tell you what I’d check: quality, duration, currency, costs, and where the “catch” is (if there is one). Tell me your case.
