Investment in bonds often appeal to investors looking for a regular income stream because they offer regular coupon payments. The prices of bonds tend to move less sharply than equities, so they are sometimes regarded as a safer haven from market turbulence. Like all investments, however, bonds are not risk-free - the price of bonds is generally affected by changes in interest rates and inflation, and because they are debt instruments there is a risk that an issuer might run into financial difficulties and fail to meet these obligations, which is called a ‘default’. The likelihood of this happening will depend on the financial strength of the issuer.
When you invest in a bond fund, your money is pooled with other investors’ money and invested in a wide range of individual bonds with different coupons and maturity dates according to the investment parameters of the fund. This diversification helps to reduce your investment risk as you aren’t reliant on the fortunes of a single company or government.
Because bond funds invest in a number of different bonds - all with different coupons and maturity dates - they can’t promise a fixed return and so instead may aim for a target return. If you invest in a bond fund the income you receive is called the ‘yield’. The ‘distribution yield’ gives an indication of the amount of income that is expected to be distributed over the next 12 months, expressed as a percentage of the current fund price less fees and charges.