Investing - Theory, News & General • Bond fund component bonds: are they ever sold at a loss?

I don't see why this is any different for bond funds versus stock funds. An index fund will sell, for a gain or a loss, if the index changes. An actively managed fund will sell, for a gain or a loss, if the manager believes there is a better alternative investment.

The fundamental difference between bond and stock indexes is that bond indexes change by force. A large-cap stock may never become small-cap, so a large-cap index may hold it forever. A long-term bond will always become a short-term bond at some time, so a long-term bond index must eventually drop it.

The difference is that with actively managed stock funds the manager is trying to pick stocks that will do well (in other words better than anybody else realizes) so that the fund outperforms an index fund. This is so difficult to do consistently, and so few people have managed to do it consistently, that it's usually not worth paying somebody to try to do it.

With a bond fund managers can analyze things like default risk, interest rate risk, sometimes call risk, liquidity problems and relevant economic and political developments to get better results than would be obtained with a buy-and-hold to maturity approach.

Absent default, a bond will be redeemed at face value on it's maturity date. What changes is the value of the bond on the open market before that date. A skilled manager who understands all the factors affecting the mark-to-market value of the bond can consistently obtain better results than someone who always holds to maturity. The same can not be said of stocks which do not have a guaranteed value on a certain future date. Managing stocks is about trying to predict the future. Managing bonds is about understanding the present.

Statistics: Posted by Florida Orange — Wed May 08, 2024 7:58 am — Replies 26 — Views 2316

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