Definitions of Pension Fund


Conservative investors in particular prefer bonds and fixed-income securities to the price jumps of stocks on the stock exchange. But it is not for everyone to continuously look for bonds with good yields. For this clientele, pension funds offer an excellent alternative, although there are a few subtleties to consider. The fund management takes over the selection of the papers and monitors the market. At one point, bonds with lower interest rates are exchanged for bonds with better yields. The investor only receives his interest credit once a year.

  • The different focal points for risk classes make it clear that there are also risks to be taken into account with bonds.
  • Short for PF by abbreviationfinder, pension funds are not only offered in euros, but also in foreign currencies.
  • In most cases, the front-end load when purchasing a bond fund is three percent.

The different investment focuses in bond funds

Just as there are different investment focuses in the equity fund landscape, a differentiation must also be made in the case of bond funds. In addition to the classic bond funds, which mainly invest in European government bonds, there is a whole range of other areas of focus. The most popular of these are corporate bonds, US bonds and funds with a focus on Scandinavia, Japan and Great Britain. In the case of bond funds, a distinction is also made between the maturities of the bonds in the fund itself. Here, too, there is the classic breakdown between short-term, medium-term and long-term listed bonds.

Note risk class

The different focal points make it clear that there are also risks to be considered when it comes to bonds. The association that a loan is automatically a loan from the Federal Republic of Germany quickly turns out to be a mistake. A bond fund with German or European government bonds quoted in euros naturally ranks under risk class two, the second most secure form of investment. Other funds that invest in bonds of any quality in Eastern Europe, for example, tend to be assigned to risk class four, the second most risky of the five risk classes. Options, futures, and small business stocks in emerging markets are in the riskiest, fifth tier. When choosing a bond fund, investors should therefore deal intensively with the investment focus

The currency risk

Pension funds are not only offered in euros, but also in foreign currencies. For the investor, this means both a risk and an opportunity. Depending on the development of the euro in relation to the respective foreign currency, additional profit may arise when the income is distributed or when the shares are sold, but there is also the risk that the income will be reduced due to a loss in exchange rates. Bond funds with first-class bonds but in foreign currency therefore have a different risk rating than comparable funds in euros.

Convertible bonds and participation certificates

Convertible bonds and participation certificates are a special type of bond. There are special bond funds for these two categories. In the case of convertible bonds, the issuer of the bond has the option at the end of the term to hand over shares in their own company for the equivalent value to the buyer instead of the amount paid.

Participation certificates are a mixture of shares and bonds. The paper has a fixed term and is repaid at the end at face value. However, the interest rate is not fixed, but is based on the company’s business success, analogous to a dividend payment. The design of a participation certificate is individual. Capital flowing into the company through profit participation certificates has the character of equity. Funds of this type have offered very respectable performance and distributions in the past.

Distribution or retention?

As a rule, buyers of bond funds attach great importance to regular and stable dividends; price increases tend to be of secondary importance. However, there are also pension funds that do not distribute the income, but reinvest it directly. This increases the value of the individual shares, which ultimately has a positive effect on the sale.

The cost of pension funds

In most cases, the front-end load when purchasing a bond fund is three percent. Some foreign providers, primarily from Great Britain, also set 4.5 percent. The range of front-end loads is also based on the underlying bonds of the respective bond fund. Euro bonds have less of an impact on price than bonds from a fund that invests in emerging markets. When setting up a custody account, it makes sense to check whether the bank grants discounts on the front-end load. This is significantly noticeable in the net return.