What Is a Bond Fund?

Investing in bonds is a growing trend in Vietnam today thanks to capital preservation and steady returns, and it is far safer than stocks. In a volatile market like today’s, bonds are an asset that helps investors balance their portfolio effectively. However, investing in bonds requires capital and in-depth analysis of the issuers, which not every investor has the time or knowledge to do. Bond funds are a product that solves these problems:

What Is a Bond Fund?

A bond fund is a type of open-ended fund run by a fund management company. It invests mainly (80% or more of its net asset value) in low-risk, fixed-income assets such as government bonds, municipal bonds, bonds of reputable companies and other valuable papers.

Put simply, investing in a bond fund means contributing money for the fund to invest. Your ownership is represented by fund units, and your return comes from a rise in the unit price or from dividends paid out (much like buying shares)

Example: at the start of the year a fund unit costs VND 10,000 and at the end of the year it is worth VND 10,500, a return of 5% a year.

What Returns Do Bond Funds Deliver?

According to returns data for all 9 bond funds in the Vietnamese market (from Fmarket), returns over the most recent year ranged from 1.66% to 8.33% (4 of the 9 funds returned less than 6% in the past year).

Compared with bank deposit rates, bond fund returns can vary quite widely, from 2% to 9%, and depend heavily on the skill of the fund managers, so be careful and do thorough research before putting money into a bond fund.

Who Should Invest in a Bond Fund?

This is a low-risk investment with steady returns (usually higher than savings rates), so it suits investors who are:

Busy, without time to follow the market every day.

Looking to invest regularly over the long term for steady returns at low risk.

Following the “don’t put all your eggs in one basket” principle and wanting a defensive asset against falling or highly volatile markets.

Pros and Cons of Bond Funds

As with any investment product, advantages and drawbacks go hand in hand. Let’s look with Green Chart at some factors investors should weigh when investing in bond funds:

Pros:

Low risk: the biggest advantage of a bond fund is probably its low risk and steady income. When you invest in stocks you have to watch the price board constantly and worry about the market’s ups and downs; with a bond fund, you don’t need to put in that effort. The fund management company does all the research and, under its original commitments, must invest in highly stable products that provide fixed income.

High liquidity: with bond fund units, you can buy or sell whenever you like, and the fund management company is obliged to buy back your units. The selling price is calculated on the day you place the order, and settlement is fast; the money is usually in your account by T+3.

Easy to invest: bond funds don’t require much starting capital; you can invest with as little as VND 10,000. You also don’t need to study companies or the market in depth; you just need to find a fund management company whose portfolio fits your investment needs.

Cons:

Lower returns than other investment assets: because the fund mostly invests in bonds with steady returns, bond fund returns cannot jump dramatically compared with other forms of investment. If you want returns above 10% a year, a bond fund probably won’t appeal to you. This drawback is partly offset by the diversified portfolio, which in bad times helps limit the risk of losing your principal.

Management fees eat into your returns: bond funds are actively managed, so their annual management fees are far from small, ranging from 0.5% to 1.5% a year. Keep an eye on this fee when investing in a bond fund, since average bond fund returns are not very high to begin with.

How to Buy and Sell Fund Units, and the Taxes and Fees Involved

Buying and selling fund units is now very simple: you just create an online account and trade through the issuing company’s app. Trading times vary from fund to fund

The main costs of investing in a fund:

Subscription fee:

The fee you pay when buying fund units (as a % of the buy order value). Most management companies currently waive this fee, but they may change it in the future, so check their fee schedules regularly. When charged, it is usually 0.5%–1%

Redemption fee:

The fee you pay when selling units back to the fund management company, as a % of the transaction value. It falls gradually to zero depending on the holding period set by the fund; at some funds, you pay no redemption fee once you have held the units for more than 6 months.

Management fee:

This varies by fund, ranging from 0.5% to 1.2% of NAV a year.

Switching fee:

The fee for switching between funds of the same management company. It varies by fund but is usually no more than 5% of the value switched.

Bond Funds vs Buying Individual Bonds

Bond funds and privately placed bonds both provide investors with fixed income regardless of how the stock market moves. But each suits a different kind of investor.

Bond funds suit investors who:

Don’t have much time to research individual bonds. With bond funds, the fund managers research and choose suitable investments on your behalf in line with the fund’s policy. Their caution helps investors preserve their capital, but it can also be a drawback when investing becomes so cautious that the fund buys products with very low returns. As the figures above show, many funds average returns of less than 6% a year

Have little starting capital and want to invest regularly: with a bond fund, you can start with just VND 10,000 and add money every month, just like a savings account.

Individual bonds suit investors who:

Want higher returns and have time to research bond issuers. If you are a seasoned investor, very familiar with bond investing and fully equipped with the knowledge and skills to assess investments, you will probably prefer to buy individual bonds.

Have relatively large starting capital, or meet the criteria for professional investors (taxable income > VND 1 billion or listed securities worth VND 2 billion, etc.) required to enter this market.

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