Will bond fund investment be risky? The common misunderstanding of early investors is that "bonds and funds are safe". Investors can understand that the word "fixed income" is confused with the price that does not fluctuate. However, the value of fixed-income investments such as bonds and funds may depreciate.

To understand the operation mode of bond funds, we must start with the operation mode of individual bonds. Because bonds and funds are collective investments that hold bonds. But bonds and bond funds actually operate in different ways, especially in terms of pricing and performance.

The risk of bond funds is usually lower than that of equity funds. But investors wisely understand that the value of bond funds may fluctuate. The best idea for investors is to find a suitable bond fund, hold it for a long time, and try not to care too much about fluctuations.

Before investing, please consider the investment objectives, risks, expenses and expenses of the fund.

Generally speaking, the bond market fluctuates greatly and there is interest rate risk in fixed-income securities. As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more obvious for long-term securities. Fixed-income securities also have inflation risk, liquidity risk, bullish risk, issuer's credit and default risk and counterparty. Different from individual bonds, most bond funds have no maturity date, so it is impossible to hold them until maturity to avoid losses caused by price fluctuations.

When the price of bonds purchased in the secondary market is lower than the specified redemption price and exceeds the legal amount, market discount will occur. Before making any investment, you should check the official statement of relevant products for additional taxes and other considerations.

Investing in municipal bonds to obtain tax-free income may not be suitable for investors of all tax categories or all account types. The tax law may change. For investors with a certain income level, the preferential tax treatment for municipal bond interest income can be revoked or gradually cancelled.

Foreign securities are affected by interest rates, exchange rates, economic and political risks, all of which are magnified in emerging markets.

Low-quality debt securities usually provide higher yield, but due to the potential change of the issuer's credit quality, it will also bring greater risk of default or price change.

What makes bond prices fall and the value of bond funds fall?

Bond prices move in the opposite direction to interest rates. Imagine if you consider buying personal bonds (not the same fund). If today's bonds pay higher interest rates than yesterday's bonds, then you naturally want to buy bonds with higher interest rates today, so that you can get higher returns (higher yields).

However, if the issuer is willing to give you a discount (lower price) to buy bonds, you can consider paying yesterday's low-interest bonds. As you may guess, when the current interest rate rises, the price of old bonds will fall, because investors will demand discounts on the old (and lower) interest payments. Therefore, bond prices are contrary to interest rates, and bond fund prices are sensitive to interest rates.

Bond funds operate differently from bonds, because the same fund contains dozens or hundreds, and bond fund managers constantly buy and sell the basic bonds held in the fund. As mentioned earlier, bond funds have no "price", only the net asset value (NAV) of the relevant funds. The manager must also meet the redemption (withdrawing funds from the same fund from other investors). Therefore, changes in bond prices will change the fund's net asset value.

In the context of rising interest rates, bond prices generally fell. Again, this is because bond investors don't want to buy bonds with lower interest rates unless they buy bonds at a discount price.

In addition, the longer the maturity date, the greater the price fluctuation related to the change of interest rate. In the period of rising interest rates and falling prices, the value of long-term bond funds will fall more than that of short-term bonds. Therefore, when the expected interest rate rises, some investors and money managers will change their fixed-income investments into shorter-term investments. When interest rates fall, the longer the term (that is, long-term bond funds) may be a better choice.

In short, if bond managers sell bonds in large quantities in an environment of rising interest rates, bonds and funds may lose their value, and investors in the open market will demand a discount rate (pay a lower price) for old bonds with lower interest rates. In addition, falling prices will adversely affect the net asset value.