Sunday, March 4, 2007

Less risk with foreign bonds

Foreign bond funds are ideal for investors seeking income and diversification. Foreign bond funds, as their name suggests, invest in bonds that pay their interest and principal in a currency other your home currency. Foreign government and corporations issue these bonds.

A foreign bond receives interest and generates income for investors, just like a domestic bond. It will fluctuate in value - declining when interest rates go up, and increasing when interest rate go down. Foreign bonds will also increase and decrease in value when their currency changes relative to your home currency. Investors should consider foreign bonds as an excellent investment alternative.

Why are foreign bond funds worth considering? They offer excellent diversification and return potential.

  1. Foreign bonds funds are poorly correlated with other investment categories.Thus, foreign bonds make a great addition to a portfolio; they ill reduce the risk and provide opportunities to adjust your investment mix between bonds and equities.
  2. Foreign bond funds are unique because they have the ability to invest throughout the world. To find bonds with higher returns investors should consider foreign bonds, which do offer higher returns than their domestic counterparts.
  3. Changes in currency can boost returns. Since foreign bond funds invest in bonds of other countries, they will in turn invest in other currencies. This risk and opportunity is higher for foreign bonds because a larger portion of the bond's return is derived from changes in currency. A good foreign bond manager will add value in the fund by capitalizing on both currency and bond opportunities.
About the author

Tony Reed is the author of " Less risk with foreign bonds", please visit his website Bonds trading & futures for more information.

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