These funds can provide you with regular interest income and the potential for modest capital growth by investing in bonds of varying maturities and credit quality.
Income funds, also known as bond funds, invest in a diversified portfolio of debt instruments such as bonds issued by Canadian federal and provincial governments as well as bonds issued by Canadian corporations. Income funds with a global focus will invest in bonds issued by foreign governments, corporations and other entities. Unlike cash equivalent funds, income funds can invest in bonds with longer maturities or different creditworthiness in order to generate a higher level of income for investors. They are best suited to investors who are focused on generating a higher level of regular income from their investments and are willing to accept a moderate amount of risk in pursuit of that goal.
Fixed income can be an intimidating asset class and there’s no shortage of terminology. Here are a few introductory bond terms.
Coupon: the interest payment received by the bondholder throughout the life of the bond, typically semi-annually.
Coupon rate: the interest rate, set when the bond is issued, that determines the coupon payment over the life of the bond.
Maturity: the length of time until the bond comes due and the bondholder receives the par value of the bond.
Principal/Par value: the face value of the bond, typically the amount originally loaned to the issuer, as well as the amount returned to the bond holder at maturity. A bond can trade below (discount) or above (premium) to its par value.
Credit quality: the likelihood that the bondholders will receive the amounts promised at the due dates.
Duration: measures a bond’s price sensitivity to changes in interest rates.
Distributions may consist of net income, and/or dividends, and/or net realized capital gains and are taxable in the hands of the investor. Monthly distributions are made by the last business day of each month, or the last business day of each calendar quarter for quarterly paying fund series, other than in December. The final distribution in respect of each taxation year will be paid or payable by December 31 of each year or at such other times as may be determined by the fund’s Manager. Generally, any capital gains dividends with respect to corporate class funds are distributed within 60 days following the calendar year end. Distributions are automatically reinvested unless an investor elects to receive them in cash. Investors should not confuse a fund’s distribution rate with its performance, rate of return or yield.
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or insured by the Canada Deposit Insurance Corporation or any other government deposit insurer, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns.