Are bonds funds a good source of income? If so which ones?

Bond funds offer an alternative income source to equities. A bond is essentially a loan to a company and the terms of the bond, including the interest paid, are agreed at outset. As such, investors are exposed to credit risk i.e. that the bond issuer goes bust. However, corporate bond funds will typically invest in 100-200 different bond issues to diversify risk and not over-expose investors to the fortunes of one company.

What level of income can you expect?

One way of expressing the level of income payments investors are likely to get from a bond fund is to look at the current yield, which gives the current income as a percentage of the price you pay for the investment. The average current yields on bond funds by type (according to the Investment Management Association's categorisation) are given below:

IMA bond sector Yield Sterling High Yield 5.79 Sterling Strategic Bond 3.89 Sterling Corporate Bond 3.56 Global Bonds 2.19

 

The current yield for individual funds ranges from 3% (on the lower risk investment grade bond funds) to 5% (on high yield bonds).