Question 1

What is a fixed-income fund?

Accepted Answer

What is a fixed-income fund?

A fixed-income fund is a fund that invests the money in fixed-income securities such as bonds and commercial papers.

The government, local councils, banks and large companies sometimes need to borrow money. And they do not necessarily go to the bank to borrow it. Instead, they issue bonds or commercial papers, which is just another term for loan securities. Bond is another word for obligation, in this context, an obligation to pay a rate of interest to the owner of the bond and repay the whole loan amount on a fixed date. You, or the mutual fund, can “lend” a local council money, and in return you get a certificate, a bond (or promissory note if you will), which obliges them to pay you interest.

Question 2

When should I save in a fixed-income fund?

Accepted Answer

When should I save in a fixed-income fund?

You can consider saving in a fixed-income fund if you want a higher return than a normal bank savings rate and have a saving timeframe of two years or more. Fixed-income funds are suitable if you want low risk for your savings, while the likelihood of a negative return over time is very small. You must be willing to accept moderate fluctuations in your savings. Saving in a fixed-income fund is also a good solution for anyone who wants to combine investments in equity funds with fixed-income funds so you can adjust the risk in your overall savings portfolio.

You should not save in a fixed-income fund if you cannot tolerate the return being negative during certain periods, or if you want a very high return.

Question 3

How are annual prices and issuing of new shares in fixed-income funds adjusted?

Accepted Answer

How are annual prices and issuing of new shares in fixed-income funds adjusted?

Prices of fixed-income funds change at the start of a new year. In practice, this means that as a unit holder, you get more fund shares, while the NOK value stays the same.

Interest income and profits realised in Norwegian fixed-income funds are paid in form of new shares.

Any mark-to-market losses – when a fixed-income security is sold for less than the Portfolio Manager paid for it – will reduce disbursements. This takes place by taxable income from the fund (interest income, realised profits minus losses) being converted to so-called “return shares”. At the same time, the price of the fund shares decreases.

Taxable return is not the fund’s return.

What you get from new fund shares is not the same as the fund’s returns. The returns in the fund thus include unrealised profits – when fixed-income securities are priced higher than what the Portfolio Manager paid, and any losses.

When the fund’s value is set, both unrealised and realised profits and losses are taken into account. However, tax is only calculated on realised amounts. Realised just means that the Portfolio Manager has sold fixed-income securities.

Note that unrealised profits in the fund are not taxed until you sell the fund shares. Equally, you get tax deductions on losses the day you sell the shares.

Fixed-income fund

What is a fixed-income fund?

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