So, they might find some helpful guidance in the new publication Plain Talk on Bond Risks from the Vanguard Group. The Valley Forge, Pennsylvania-based investment company issued the booklet Wednesday because of the bond funds’ popularity, Vanguard said in a news media announcement.
“Money is pouring into bond funds at a record pace in 2002 and we want to make sure that investors understand interest rate and other risks inherent to bond fund investments,” said Catherine Gordon, head of Vanguard Investment Counseling and Research Group, in a statement.
The Vanguard booklet includes information about several basic bond fund concepts including:
- that bond funds do carry risks – primarily interest rate risk. Increasing interest rates spark a fall in bond fund prices. Short-term bond funds don’t lose as much as their long-term fund counterparts. Gordon noted that a recent Vanguard test of investor literacy found that 70% of the respondents did not understand that bond prices and interest rates tend to move in opposite directions.
- that higher yield bond funds typically carry much greater risks. For example, higher yield corporate bond funds carry a greater degree of credit risk – the chance that companies issuing a fund’s bonds will default on them.
- that Government National Mortgage Association (GNMA) bond funds are not insured against loss.