Bond-and-Equity Funds

Petko Bahovski

In this chapter we look at funds that combine both bonds and equities. The risk and return of those funds are somehow linked to the performance of both asset classes, or have features that are linked to both.

We will start with convertible-bond funds. Convertible bonds have the features of normal bonds, but the bondholder has the option to convert the bond of the company that they are holding into company shares at an agreed, prespecified ratio. Convertible bonds allow investors to participate in the upside gain of the stock price of the company, while protecting the downside through guaranteed coupon payments.

The next section is on balanced funds. Balanced funds combine stocks, bonds and money-market (cash) investments into their portfolios. Those funds would usually stick to a relatively fixed mix of stocks and bonds. Some may be more conservative, others may have a more aggressive investment approach.

The third section is on total-return funds. Those funds seek both to maximise gains from income-generating securities such as bonds and dividend-paying stocks, and to invest in securities that are expected to appreciate in price. The coupons and dividends received are