Bonds are debt obligations of the issuer to return the principal amount with interest to the investor. Bonds are issued by both domestic and foreign entities such as a government or corporation. So it can be differentiated based on geographies, just like equities. Refer to our previous blog on equity Equity Funds (right to ownership). But the more common differentiator for bonds is time horizon or duration.
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A typical retirement plan may have anywhere between 15 to 30 investment options. In certain cases, the list may contain 100+ options. Honestly, the longer the list, the harder it is for employees to make a sensible choice. Keeping a tab and trying to understand so many options is not an easy task and requires a lot of time. And that dilemma sometimes results in inaction and you may end up parking your hard earned money in assets that don’t offer a good return or charge higher fees.
Let’s take an example of a retirement plan that has 15 options. A typical line up consists of 7-8 equity funds,4-5 bonds and 1-2 options focused on specific assets like real estate, oil & gas etc.
Let’s dig deeper into equity options. The first question in your mind may be ‘why 7-8 equity funds?’ The idea is to offer choice and diversification so that you don’t pull all your eggs in one basket.
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