Over the past few weeks we have been discussing investing in fixed income securities directly, however for a fixed income investor who wants to diversify his or her fixed income holdings, it may be difficult to effectively do this, as the minimum requirements to invest in each fixed income security may be prohibitive, or the investor may not have the time or the expertise to conduct research into each fixed income security. One way to overcome these obstacles is to invest in a fixed income mutual fund.

A fixed income mutual fund collects money from a group of investors and then places the fund into a shared pool. A fund manager then takes this cash and invests in fixed income securities in accordance with the mutual fund’s mandate. The fixed income securities that the fund manager invests in are typically thoroughly researched by the research department of the mutual fund company. By investing in wide range of securities the fund manager is limiting the overall risk of the fund. Just as an individual investor will be subject to default risk and interest rate risk so too is the fund manager but he is able to better mitigate that risk by diversifying.

Unlike other mutual funds which offer varying rates of return, fixed income mutual funds usually offer a certain level of guaranteed income. Every investor in a fixed income mutual fund receives periodic payments from the mutual fund in accordance with the amount of money that he originally invested. These payments which come from the periodic interest payments that are paid by the fixed income securities are usually distributed to the investor on a monthly basis. During this time the managers of the fund continue to decide which government or corporate bonds to they are going to invest.

In order to withdraw money from a fixed income fund investors will need to sell some or all of their shares in the mutual fund company. This is not a problem as the mutual fund companies tend to repurchase the shares from investors at a price called the net asset value. The net asset value is simply the market price of the holdings of the fund minus any expenses; this figure is normally calculated at the end of every work day.

There are a number of local fixed income unit trusts or funds available in Jamaica as well as US dollar fixed income fixed income funds. One example of a US dollar fixed income fund available in Jamaica is the Signature Canadian Bond Corporate Class. This fund as it name implies invests primarily in the fixed income securities of Canadian Governments and companies. The company has averaged a return of 9.55%p.a. since its inception (2003), which is an excellent return in US dollar terms, it also as a year to date return of 3.65%. The fund also has consistently beaten other funds within its category over its lifespan, indicating that the fund is very well managed.

So for those fixed income investors who want to diversify, try considering a fixed income mutual fund.

Bob Russell is the assistant vice- president, structured finance at Mayberry Investments Limited. He can be contacted at bob.russell@mayberryinv.com