Can You Still Buy This Debt Fund Up 55% in 3 Years, Now Up 17% YTD?

A few days ago, a friend sent me a screenshot of a fund, saying that they had bought a bond fund, but the daily drop reached 1.96%.

This friend also asked, isn't a convertible bond fund a type of bond fund? Why did it drop so much as soon as I bought it? I originally thought that the stock market is unpredictable, so I came to buy bonds to earn some stable returns, but I ended up losing more. What's going on?

To answer this question, we first need to understand what a convertible bond is and how it differs from a regular bond, and then what data to pay attention to when selecting bond funds.

This article also provides a specific fund case for everyone to see how to identify risks in bond funds.

1. Convertible Bonds

Everyone knows about bonds, which are equivalent to an IOU. The money lent out can be returned with principal and interest upon maturity. Convertible bonds are also like this, but they have a characteristic: they can be exchanged for stocks to enjoy the rise in stock prices and the dividends of company development.

When the stocks corresponding to the convertible bonds you bought rise, you can choose to exchange them for stocks or sell them at a higher price to make a high profit. However, when the stock price falls below the conversion price, convertible bond investors can only wait until maturity to get the principal and interest. But because the interest rate of convertible bonds is lower than that of the same level of regular bonds, it will result in interest loss.

Since the returns of convertible bonds are highly correlated with stock price fluctuations, convertible bonds also have significant fluctuations like stocks, which is what we usually refer to as the strong stock nature of convertible bonds.

Looking at the trend of the CSI Convertible Bond Index in the past few months, it experienced a significant drawdown from mid-September to mid-October. Although it has recently rebounded, the volatility of convertible bonds is evident.However, convertible bonds have experienced fluctuations in recent days. Although they have fallen and then risen again, it is important to pay attention to the increasing risk of volatility in the future.

2. Convertible Bond Ratio

After understanding convertible bonds, when selecting bond funds, you should be cautious. If you are looking for stable returns, you should avoid bond funds with a high proportion of convertible bonds. If you want to occasionally achieve some excess returns while maintaining relative stability, you can appropriately increase the proportion of convertible bonds. Choose the right fund according to your own needs.

Because convertible bonds have a strong stock nature, when the proportion of convertible bonds is high, it also tests the ability of the fund manager. Some funds may look good when purchased but may fail to adjust their positions.

This bond fund performed well in the first half, but after falling from September to October, it could not rise again. We can see from the above China Convertible Bond Index that it quickly rose to a new high after falling. Why didn't this fund rise later? We can see from its position changes.

It can be seen that at the mid-year report of this year, the proportion of convertible bonds in this fund was 58%, which was quite high. At that time, the market was good, so it rose smoothly in the front. However, in the third-quarter report, the proportion of convertible bonds dropped to 42%. The third-quarter report ended in September, and after that, this fund may still have reduced its convertible bond position. After the fund fell, the fund manager reduced the convertible bond position, which led to the lack of strength to rise later.

3. Summary

In this article, we discussed what convertible bonds are and the need to pay attention to the proportion of convertible bonds when selecting bond funds or fixed-income + funds. Make choices according to your own needs. At the same time, although it is a bond fund, you should also pay attention to the qualifications of the fund manager.