Protect purchasing power with bond funds
When higher inflation becomes a concern, it's an opportune time to explore investments with inflation protection that are good for the long term. Namely, real return bond funds.
Real return counts
When evaluating investments, we typically focus on what's known as "nominal" return. If you invest $1,000 and it grows to $1,040 after a year, your nominal return was 4%. But if inflation was 3%, you really gained just 1% in purchasing power. This figure is known as the "real" return. The greater the inflation rate, the harder it is to build wealth for the future.
After the high inflation rates of the 1970s and 1980s, the governments of Canada and several provinces began issuing real return bonds* as a source of stable long-term funding. These bonds protect investors from inflation by linking both principal and interest to the consumer price index. This means that real return bond performance tracks the rate of inflation.
Because real return bond funds hold real return bonds, they also carry inflation-risk protection, and tend to be less volatile than traditional long-term bond funds. However, it also means that real return bond funds typically have more modest growth potential than regular bond funds. And, like any mutual fund*, they can go down in value.
What real return bond funds are available in Canada
A number of Canadian mutual fund companies offer real return bond mutual funds. The minimum investment for most is well under $1,000. In addition to Canadian issues, these funds may hold foreign-currency real return bonds from the U.S. and European governments.
Real return bond mutual funds should be held in a registered plan, such as an RRSP, RRIF, RESP, or TFSA. Because both principal and interest are adjusted to reflect inflation, the adjustment to the fund's principal must be included as income every year, even though you don't receive the bond income until the bonds are sold or mature.
If you're interested in an investment for long-term investors in inflationary times, professional advice can help determine whether they might have a place in your portfolio.
Contact us today to review your portfolio and create the best investment strategy for you.