Nontraditional Bond Funds may lead to Risky Business

Investors wanting larger yields have been putting their money into so-called nontraditional bond funds, unaware of the added risks they can pose. Danielle Donahoes, president of Rinehart Wealth Management in Charlotte, N.C., says “Investors think fixed income and they think bonds and they think safety, but in many cases nontraditional bonds mean buying instruments that have a more risky profile”. U.S. Treasuries and high quality corporate bonds tend to dominate the fixed income markets and are considered ultra-safe. Nontraditional bond funds on the other hand can be invested into the debt of lower-rated companies, emerging-market government bonds and other securities that offer higher yields, but greater risks. Investors looking to allocate money for their fixed income clients should spread their investment across six or seven different segments of the bond market, where the risks and rewards look clearer.

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