7 Best Fidelity Bond Funds to buy for generating income

We may earn a commission for purchases through links on our site, Learn more.

Share This Article:

If you wish to know the best Fidelity bond funds to buy, you are on the right page.

Throughout 2022, as interest rates continued to rise, fixed-income investors faced significant losses, marking a historically challenging period. However, a more optimistic outlook is emerging for bonds. The trend of higher bond yields observed in 2023 presents the possibility of positive shifts for fixed-income investors, potentially leading to improved income prospects.

Preceding 2022, those seeking elevated income often gravitated towards riskier options such as dividend stocks, preferred shares, and real estate investment trusts (REITs). Yet, the current landscape, with even risk-free certificates of deposit offering returns surpassing 5%, has heightened the appeal of fixed-income investments for individuals searching for yield.

While purchasing individual bonds remains an option, opting for a bond mutual fund could offer a more advantageous avenue due to its increased liquidity, accessibility, and simplified approach. These funds amalgamate bonds from diverse issuers, maturities, and credit ratings into a consolidated portfolio, enabling investors to purchase or sell units.

Choosing a bond mutual fund yields two principal advantages over acquiring individual bonds. Firstly, bond funds tend to be more straightforward to evaluate and trade compared to their individual counterparts. Moreover, most bond funds distribute interest on a monthly basis, differing from the standard semiannual coupon payments typical of individual bonds.

For those on the hunt for suitable bond funds, Fidelity stands out as a prime destination. With a broad array of both passively indexed and actively managed options, Fidelity provides an extensive selection. Notably accommodating for beginners, Fidelity’s funds boast features such as minimal fees, no investment minimums, and an absence of sales charges.

Here’s a look at seven of the best Fidelity bond mutual funds worth buying in 2023 for steady income. These funds offer different levels of credit and interest rate risk, making them suitable for a wide range of investor risk tolerances:

Fidelity Focused High Income Fund (FHIFX)

The Fidelity Focused High Income Fund (FHIFX) is a bond fund that seeks to provide higher income through investing in lower-quality, non-investment-grade fixed-income assets. According to Mark Andraos, an associate portfolio manager at Regency Wealth Management, the pursuit of higher income typically involves taking on greater credit risk. This is because investors demand compensation for the added credit-risk premium over risk-free Treasury bonds, which have no default risk. For investors willing to accept the trade-off between income and credit risk, FHIFX could be a suitable choice.

FHIFX’s primary focus lies on non-investment-grade assets with a rating of BB by Standard & Poor’s or Ba by Moody’s. These assets are commonly referred to as high-yield or “junk” bonds. Despite their increased risk, they offer a notably high yield as a way to offset their inherent uncertainties. For instance, FHIFX currently boasts a 30-day SEC yield of 6.2%. The fund comes with an expense ratio of 0.75%, equivalent to an annual fee of $75 for a $10,000 investment. This ratio covers the costs associated with managing the fund and is deducted from the fund’s returns.

Fidelity Corporate Bond Fund (FCBFX)

The Fidelity Corporate Bond Fund (FCBFX) offers a suitable option for investors who have a lower risk tolerance and seek a more conservative approach in their income-producing bond investments. This fund is particularly attractive when contrasted with high-yield bonds, which often come with increased volatility and downside risk due to their lower credit quality, especially in times of market turbulence.

Notably, high-yield bonds frequently experience credit downgrades leading up to economic downturns, as noted by Andraos. To mitigate such risk, FCBFX stands out as an appealing choice. Unlike FHIFX, FCBFX concentrates on investment-grade corporate bonds, denoted by ratings of BBB or higher according to S&P. In its portfolio, BBB-rated corporate bonds constitute 58% of the holdings, with key players such as JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) in the financial sector.

The FCBFX fund presents an enticing 30-day SEC yield of 5.4%, making it an appealing option for those seeking income generation. Furthermore, its expense ratio stands at a reasonable 0.44%, enhancing its overall attractiveness as a sound investment avenue for investors with a more cautious risk appetite.

Fidelity Short Duration High Income Fund (FSAHX)

The Fidelity Short Duration High Income Fund (FSAHX) is influenced by an important aspect known as “duration,” as explained by Steve Pilloff, an associate professor of finance at George Mason University. Duration refers to the sensitivity of bond prices to changes in interest rates. Bonds with longer durations experience greater price fluctuations when interest rates change. This was evident in 2022 when longer-duration bonds faced significant losses due to interest rate shifts.

To counteract this risk, investors have the option to choose a short-duration fund like FSAHX. This fund has an average duration of only 2.2 years. In practical terms, if interest rates were to increase by one percentage point, FSAHX’s value might decrease by approximately 2.2%, assuming all other factors remain constant. Despite its shorter duration, FSAHX manages to offer an attractive 30-day SEC yield of 7.4%. This is achieved through its portfolio of non-investment-grade high-yield bonds and the current state of the yield curve, which has led to favorable short-term yields.

Investors should note that FSAHX charges a 0.75% expense ratio for its management and administration.

Fidelity Intermediate Treasury Bond Index Fund (FUAMX)

The Fidelity Intermediate Treasury Bond Index Fund (FUAMX) presents an option for investors who prefer to avoid excessive credit risk. This fund focuses on Treasury bonds, such as those issued by the U.S. government, which are widely regarded as the safest form of debt. This aspect contributes to its minimal credit risk profile, as Treasury securities are perceived to have a very low likelihood of default. This safety factor is underscored by the fact that an impressive 99% of FUAMX’s portfolio is comprised of U.S. government-issued Treasurys.

However, there are downsides associated with FUAMX. Notably, it has a relatively higher duration, currently standing at 6.2 years. This means that the fund’s value could be more sensitive to changes in interest rates. While this heightened sensitivity could work in the fund’s favor if interest rates decrease, it could prove detrimental if rates rise. Despite these considerations, FUAMX offers a yield of 4% at the moment. This yield is lower compared to its corporate bond counterparts due to the conservative nature of the assets it holds.

One of the fund’s standout features is its low expense ratio, coming in at just 0.03%. This cost efficiency enhances its appeal to investors seeking an economical investment option within the realm of intermediate Treasury bond funds.

Read Also:  How much does CSL Plasma pay? (2024)

Fidelity Municipal Bond Index Fund (FMBIX)

The Fidelity Municipal Bond Index Fund (FMBIX) is a tax-exempt municipal bond fund that addresses the tax implications associated with interest income from bond funds. Investors in higher income tax brackets might see their returns from corporate and junk bond funds reduced significantly by taxes. To counteract this, tax-exempt bond municipal funds like FMBIX can be a solution. FMBIX is an exchange-traded fund that mirrors the performance of the Bloomberg Municipal Bond Index. This index comprises bonds that offer interest income exempt from federal income tax.

For individuals with substantial income, municipal bond funds can be a valuable addition to their bond portfolio. According to Andraos, these funds provide tax-free income for a portion, if not all, of the generated interest income from the underlying bonds. Another advantage is the generally strong credit quality of these bonds in FMBIX, which is primarily composed of AA and AAA rated bonds. The fund offers a 30-day SEC yield of 3.4% and comes with a low expense ratio of 0.07%.

Fidelity Conservative Income Bond Fund (FCNVX)

Fidelity Conservative Income Bond Fund (FCNVX) is highlighted as a suitable option amid ongoing interest rate hikes due to its low sensitivity to such changes. According to Anessa Custovic, CIO of Cardinal Retirement Planning Inc., duration reveals a bond fund’s vulnerability to interest rate increases. Given this significance, FCNVX stands out for its ultrashort duration of only 0.3 years, effectively safeguarding it against interest rate fluctuations.

The fund primarily invests in domestic and foreign short-term corporate bonds within the banking sector, many of which hold strong credit ratings of A or AA. With an expense ratio of 0.25%, FCNVX offers an appealing choice for investors. Additionally, it boasts a 5.3% 30-day SEC yield, making it an attractive option for those seeking stability and yield amid the current market conditions.

Fidelity Floating Rate High Income Fund (FFRHX)

This fund strategically holds floating-rate notes, characterized by interest payments that align with fluctuations in interest rates. This design acts as a protective shield against the oscillations of interest rates, all the while capitalizing on the advantages of a bond fund’s liquidity. This distinct characteristic positions FFRHX to benefit from the current trend of increasing rates, evident in its impressive 30-day SEC yield of 9.3%. It’s worth noting that this yield reflects the interest generated over the past 30 days, considering the fund’s income and expenses.

Further enhancing its appeal, FFRHX boasts an exceptionally low duration of merely 0.3 years. Duration, in this context, is a measure of sensitivity to interest rate changes, indicating that FFRHX is minimally affected by fluctuations in rates. This aligns well with August’s endorsement, as it underscores FFRHX’s resilience to the risks he initially cautioned against.

Adding to its appeal, the fund’s expense ratio stands at a reasonable 0.68%. This ratio accounts for the percentage of a fund’s assets that go towards covering management fees and other expenses, providing investors with insight into the fund’s cost efficiency.

“My perspective is a bit unorthodox, as we generally do not recommend bond funds to our clients due to their exposure to market risk and greater susceptibility to fluctuations in interest rates,” says Sean August, CEO at The August Wealth Management Group. “Conversely, individual bonds provide return of principal upon maturity, barring any risk of default by the issuer.”

August’s unconventional perspective embraces the Fidelity Floating Rate High Income Fund for its distinctive approach. By holding floating-rate notes, FFRHX mitigates the impact of interest rate changes while capitalizing on the flexibility of a bond fund. This approach has led to an impressive yield, coupled with a remarkably low duration and a reasonable expense ratio. August’s endorsement stems from the fund’s alignment with his view on the potential benefits of bond funds, showcasing FFRHX as an exception to the norm.

How to choose a bond fund in Fidelity?

Choosing a bond fund in Fidelity involves considering three key questions:

  1. Investment Horizon: Determine how long you plan to keep your money invested. If you’re looking for short-term gains or need access to your funds soon, opt for funds with shorter maturities. For longer investment horizons, funds with higher durations might offer potentially better returns.
  2. Investment Goal: Define whether you’re aiming for current income or long-term growth. If you need regular payouts, focus on funds that generate consistent interest payments. For growth, look into funds with higher potential for capital appreciation over time.
  3. Risk Tolerance: Assess your comfort level with risk. Bond funds vary in risk profiles; some are more stable but offer lower returns, while others could be more volatile but potentially yield higher gains. Match your risk tolerance with the fund’s risk profile.

By addressing these questions, you can make a more informed decision when selecting a bond fund within Fidelity that aligns with your investment objectives and risk appetite.

Can I buy bonds directly from fidelity?

Fidelity offers multiple options for investors interested in bonds. You can directly purchase individual bonds, or you have the choice to invest in mutual funds or exchange-traded funds (ETFs) that focus on a variety of bonds, forming what’s known as a bond fund. This provides you with flexibility in how you choose to approach bond investments through Fidelity’s platform.

Is it better to buy individual bonds or bond funds?

When deciding between buying individual bonds or bond funds, it’s important to consider their respective advantages. Bond funds generally offer a notable cost advantage due to lower bid/ask spreads on bond transactions, except for primary purchases of Treasury bonds and TIPS. This means that bond funds can often execute bond trades at a lower cost compared to individual investors purchasing standalone bonds.

This cost efficiency is particularly relevant for regular investors looking to minimize expenses and optimize their investment returns. However, it’s essential to acknowledge that individual bonds might offer specific advantages such as tailored maturities and the ability to hold bonds until maturity, potentially reducing certain risks. Therefore, your choice between individual bonds and bond funds should be guided by your investment goals, risk tolerance, and preference for cost efficiency versus customization.

Do bonds grow your money?

Bonds offer opportunities to increase your funds through two main methods of investment. The initial approach involves holding onto the bonds until they reach their maturity date, allowing you to receive regular interest payments.

Typically, bond interest is distributed twice annually. Alternatively, the second method to capitalize on bonds involves selling them at a value surpassing your original purchase price. This can result in a profit from the transaction.

How does the fidelity Total bond fund work?

The Fidelity Total Bond Fund functions as a diversified fixed-income approach aimed at achieving competitive risk-adjusted performance in line with the anticipated outcomes of a core bond fund for investors.

This fund allocates a minimum of 80% of its assets to investment-grade bonds and can allocate up to 20% to non-investment-grade debt. In essence, the fund aims to provide a balanced blend of fixed-income securities to meet investor requirements for both potential returns and risk management.