Add stability to your portfolio
In times of market volatility, it's often a good idea to add stability to your portfolio. Here are some mutual fund ideas that may provide an ideal defensive core – for your RRSP or non-registered investments.
Consider bond funds
Because bonds* are less volatile as an asset class than equities*, they may add stability to your portfolio. Bond funds also may provide a steady stream of interest to cushion those times when equity values fall. Here are their features:
- Diversification. A large bond fund may lower default risk and boost income by holding instruments from many issuers with different credit ratings. And it may manage market risk by holding securities with varied maturities. Most individuals can't invest enough to create the same scope.
- A sizable advantage. Bonds trade between institutions and are not auctioned on an open exchange as stocks are. As a large trader, a bond mutual fund gets much better prices than a retail investor would.
- Professional active management. Fund managers trade holdings to realize market gains, as well as income flow.
A matter of choice
Here are other types of funds that can offer varying degrees of stability to your overall portfolio:
- Money market funds. While fixed-income funds tend to offer steadier returns over time than equity funds, their rates do fluctuate, and they don't offer absolute security. However, money market funds typically don't fluctuate at all. Their returns tend to be quite low, though, so they are best used for short-term parking, as opposed to long-term investing.
- Global fixed-income funds. These funds mainly hold bonds. Their returns may fluctuate more than Canadian fixed-income funds because foreign currency investments may vary when they are expressed in Canadian dollars.
- Balanced funds. These funds hold stocks and bonds, and may offer the potential for higher returns than bond funds – but with more fluctuation. Generally, the greater the potential return, the greater the potential volatility.
- Dividend funds. These funds hold primarily dividend-paying shares of blue-chip Canadian companies. To a lesser extent, they also hold bonds and income trusts. Most funds make distributions of dividend income, which, when held outside a registered plan, can benefit from the Dividend Tax Credit (dividends from Canadian corporations qualify).
- Income funds. The objective of these funds is to provide regular income, with stability. They may invest in Canadian government and corporate fixed-income securities, equities, real estate investment trusts (REITs), and royalty trusts and other high-yielding investments. They may also invest in lower-rated bonds and derivatives.
Professional advice is essential to determine the role of fixed-income funds in your overall portfolio. Contact a BlueShore Financial advisor to help you identify the funds that offer the best combination of return and stability for your needs, your time horizon, and your risk tolerance.