Investing for Income

Bonds May Provide Steady Income with Potentially Low Risk

What are bonds? Bonds are essentially IOUs. When you invest in a bond, you lend money to the bond issuer, and in exchange, the issuer promises to pay interest and return your principal once the bond matures. High-quality bonds issued by governments and corporations with strong credit ratings are considered less risky than many other investments and are often used to generate income and preserve capital.

With their predictable income stream, bonds have a history of providing stable returns in both up and down markets. For example, consider the performance of bonds over the last 20 years, which includes the equity bull run of the 1990s and the downturns of the last decade. While bonds did not grow as fast as stocks, they also did not experience the wild swings in returns. From 1991-2010, bonds generated nearly 80% of the returns of stocks, but with 70% less volatility.

Two Decades of Solid Consistent Returns

Bond vs. Equity Returns: 1992-2011
 
Annual Return and Risk: 1991-2010
Asset Class Index Average Lowest Highest Risk
Bonds Barclays Capital U.S. Aggregate Bond Index 6.50% -2.92% 18.48% 4.47%
Stocks S&P 500 Index 7.81% -37.00% 37.54% 18.56%

Note: Past performance is not a guarantee of future results. The Barclay's Capital U.S. Agregate Bond Index covers a boar array of domestic fixed income securities, including covernment, corporate, mortgage and asset-backed securities. The S&P 500 Index is one of the most commonly used benchmarks for the U.S. equity market. Risk is defined as standart deviation, the amount of volatility an investment experiances over time. The higher the standart deviation, the greater the performance swinds of the investments. Investments in both stocks and bonds involved risks, including the possible loss of principal, indices are unmanaged and not available for direct investment.

Choosing the Right Type of Bond Investments for Your Portfolio

There are many different types of bonds, including government, municipal, corporate, mortgage-backed, and international bonds. Some bonds offer tax advantages, such as exemption from federal or state income taxes. Others can provide higher income that can keep up with inflation. What is best for you depends on your needs, goals, tax situation and risk tolerance.

 

AIG Funds offers a selection of bond funds, including the AIG Senior Floating Rate Fund, a bank loan fund that may offer a degree of inflation protection, and the AIG Strategic Bond Fund, which seeks a high level of total return by diversifying assets across four global fixed income markets.

Senior floating rate funds are not money market funds; their NAVs will fluctuate and may lose value. Investment in these loans involves certain risks, including among others: risks of nonpayment of principal and interest; collateral impairment; non-diversification and borrower industry concentration; and lack of full liquidity. High yield debt instruments carry a greater default risk and may be more volatile, less liquid, more difficult to value and more susceptible to adverse economic conditions or investor perceptions than other debt instruments.