Understanding Mutual Funds #2: Characteristics of Fixed Income Mutual Funds

In the previous article, we discussed Money Market Mutual Funds (RDPU) in more detail. Now, we will discuss Fixed Income Mutual Funds, which consist of bond instruments. To learn more about bonds, please check here!

Let's take a look at Fixed Income Mutual Funds, also known as RDPT!

Definition of Fixed Income Mutual Fund (RDPT)

A Fixed Income Mutual Fund (RDPT) is a mutual fund that consists of at least 80% fixed income instruments, also known as bonds (debt securities), with the remainder generally invested in money market instruments or cash equivalents. When investing in an RDPT, the investment manager allocates the investment funds across various bond series in accordance with the strategy used to structure the RDPT product. Typically, the investment returns (coupon payments) from the bonds are reinvested into the portfolio. This means that the Net Asset Value (NAV) increases when coupons are received. However, some Fixed Income Mutual Funds distribute the coupons received to investors as dividends during specific periods.

Factors Influencing the Net Asset Value (NAV) of RDPT

Net Asset Value (NAV) is the price of a mutual fund unit, calculated by dividing the fund's total net assets by the number of mutual fund units. Several factors can influence NAV movements, which are important to understand when investing in RDPT.

1. Price Movement of Instruments

When investing in RDPT, investor funds are allocated to various types of money market instruments and bonds, which may experience price fluctuations. These price movements are influenced by factors such as investor expectations, macroeconomic conditions, bond tenure, bond ratings, and other economic conditions. As a result, the NAV or unit price of the mutual fund will also fluctuate.

2. Dividend Distribution

When dividends are distributed to investors, the investment manager may withdraw cash or capital that could otherwise be invested in bonds, leading to a decrease in the NAV. Dividends are typically paid out to investors in cash. To find out which RDPTs offer dividend distribution, please click here.

Key Factors to Consider When Investing in RDPT

When investing in RDPT, the key factors to consider are the tenor and the bond issuer. Information about the tenor and bond issuer can be found in the Fund Fact Sheet section of the Mutual Fund, specifically under portfolio composition and allocation.

1. Tenor

The tenor refers to the term of the majority of an RDPT portfolio:

• Short tenor: When the majority of funds in an RDPT are invested in short-term bonds, resulting in a total portfolio tenor ranging from 1- 5 years
• Medium tenor: When the majority of funds in an RDPT are invested in medium-tenor bonds, leading to a total portfolio tenor of 5-10 years.
• Long tenor: When the majority of funds in an RDPT are invested in long-tenor bonds, resulting in a total portfolio tenor of more than 10 years

The shorter the tenor, the smaller the price fluctuations, which means the potential return is usually lower than that of long-term bonds.

2. Bond Issuers

Investor funds can be invested in two types of bonds, namely Government Bonds and Corporate Bonds. The following are the key differences between them:

Advantages and Risks of RDPT Investment

When investing, it is important to remember that every investment instrument carries its own risks. Here are the advantages and risks to consider before deciding to invest in RDPT:

Advantages

• Potential total return, which is the sum of price changes and dividends (if the mutual fund distributes dividends), tends to be higher than RDPU because:
  • There is potential for capital gain. For example, if the benchmark interest rate is lowered, bond prices will increase (bond yields will decrease). In a cycle of falling interest rates, bond investors have the potential to earn additional profits in the form of price increases or capital gains.
  • There is the potential for dividend distributions, which will increase investors' returns (total return)
• Mutual funds are not subject to tax.
• Funds are managed by professional investment managers licensed by the Financial Services Authority (OJK)
• Investors can invest in a variety of bond series with attractive coupons and yield to maturity, which are limited in number and therefore more difficult for retail investors to access.

Risks

• Risk of a decrease in net asset value (NAV).
• Interest rate risk. When interest rates rise, bond prices will fall.
• Inflation risk. When inflation rises, the real yield on bonds will decrease. For example, if a bond has a yield of 6.00% and inflation is at 1.50%, the real yield is 4.50%. If inflation rises to 2.00%, the real yield of the bond decreases to 4.00%.
• RDPT is not guaranteed by the Deposit Insurance Corporation (Lembaga Penjamin Simpanan/LPS) as it is not a banking product.

In addition to the advantages and risks mentioned above, there are also other advantages and risks associated with investing in Mutual Funds, which can be accessed by clicking here.

So, what are you waiting for? Start investing in RDPT on the myBCA app now!