Why Has My Balance in My Diversified Fund Dropped?

Interest rates around the world have gone up recently. This has caused the value of fixed interest investments such as bonds to fall. The fall in the value of bonds can directly impact the value of your fund.

To understand why your fund’s balance has dropped, it would be helpful to know more about the fixed interest investments that your fund invests in.

Your fund’s allocation to fixed interest investments is part of the defensive component of the portfolio, which is your collection of financial investments. The defensive component is generally lower in risk and less volatile than the aggressive component or ‘growth’ investments, such as shares and property that are listed on the stock exchange. This helps diversify the overall risk and returns in a portfolio.

Fixed interest investments are issued by governments, banks, and companies. A borrower, like the Australian government, can borrow money in different ways, including fixed interest investments called bonds. Bonds pay investors regular interest at a fixed rate, called coupon payments. The borrower agrees to pay back the original amount borrowed to the investor at the end of the established period such as 5, 10, or 15 years.

Many bonds are listed on a financial exchange such as the Australian Securities Exchange (ASX), which means they can be traded or bought and sold. For investors, bonds offer the ability to lock in a better rate than ‘at call’ cash invested in a bank account or money market investments. Because a bond is a riskier investment than cash, they generally offer a better rate.

Recently, interest rates around the world have gone up. This has caused the value of fixed interest investments to fall. The fall in the value of bonds can directly impact the value of your fund. This is because the market value of your fund and its investments is tracked and re-priced daily. Therefore, your fund balance falls in line with the market and will rise in line with the market.

 

At Bluerocke, we specialize in helping High Net Worth, soon-to-be High Net Worth and want-to-be High Net Worth professionals and business owners.

Please contact us through our web-site www.bluerocke.com, if you need such help.

Negative Returns and the Quality of Fixed Interest Investments

You may wonder if negative returns mean that your investment has gone bad. Rising interest rates do not mean the quality of the fixed interest investment has changed, and it is normal for the interest rate cycle for the value of fixed interest investments to rise and fall.

It is a normal part of the interest rate cycle for the value of fixed interest investments or bonds to rise and fall over time. Rising interest rates don’t necessarily mean that the quality of the fixed interest investments in a portfolio has changed. Like before, issuers are still expected to keep paying the fixed rate of interest. When the bonds in your portfolio reach the end of their term, the issuers are expected to return the total value of the amount invested in your fund.

Other risks of fixed interest investments include:

Credit risk: when the issuer may be unable to make future income or principal payments.

Inflation risk: when inflation rises, an investor in bond will require a higher return on the investment to compensate for the effects of inflation.

Liquidity risk: when the bond may not be able to be sold quickly for a price that represents its market value.

 

At Bluerocke, we are very experienced in helping High Net Worth, soon-to-be High Net Worth and want-to-be High Net Worth professionals and business owners.

Please contact us through our web-site www.bluerocke.com, if you need such help.