Thursday, July 28, 2011

Income Mutual Funds for Bear Markets

With the recent market volatility and the performance of the S&P 500 for the past ten years one should consider using bond funds to stabilize portfolio returns and as a strategic approach to take advantage of down markets. Two bond funds that have performed well in the past ten years are Templeton Global Bond Fund and Franklin Income Fund.

Templeton Global Bond Fund (TPINX)
Yield: 5.26%
NAV: 14.04
52 Week Range: 13.23 - 14.08

This fund seeks current income and capital appreciation by investing in Government Securities around the world. There are a few things to consider when investing in bonds, since the price of bonds move in the opposite direction of interest rates the value of the fund will decline as interest rates rise. To have an approximation of the change of value due to interest rate changes we can look at duration. The average duration of this fund is 1.88 years which is very low considering its current yield and means this fund will be less effected by interest rate changes.

The other consideration is bond rating the average credit quality of this fund is BBB, on the morning star box pictured below the quality is medium as well as the duration. The return of this fund, after expenses and reinvesting of dividends and capital gains; $10,000 grows to $33,000 in ten years!

Franklin Income Fund (FKINX)
NAV: 2.22
52 Week Range: 2.04 - 2.30
Yield: 6.32%

The goal of this fund is to maximize current income by investing in investment grade bonds and convertible securities while maintaining a portion of the portfolio in dividend paying stocks for capital appreciation. The value of this fund is more susceptible to swings in value due to its stock holdings but the dividends of this fund have been more stable as the portfolio managers try to pay out the same amount each month.

As pictured below the duration of this fund is a little longer but it is still limited so you don't have to worry as much about rising rates. The quality is lower as well which explains the higher yield. 

There are many options for reinvesting the dividends of both funds, you could cross reinvest into an equity fund when the market is down and reinvest in the fund when the market is up. Stocks and Bonds historically move independently of each other and generally bond prices rise when the market declines which means we could hold money in these income funds and in March of 2009 when the market bottomed out we could have moved money out of the bond fund into a stock fund.

These two funds are just another consideration we should take when investing to better diversify our portfolio, to learn how to purchase these particular funds email me at
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