Home > Education > Financial Planning & Investing > Q&A: Below Investment Grade Bond Red Flag?
Edelman Financial Engines Decorative Triangle Background

Q&A: Below Investment Grade Bond Red Flag?

Know if your future is stuck in the junk business.

Question: A portion of my friend’s 401(k) portfolio is invested in a bond fund offered by a well-known mutual fund company. On his quarterly statement, the fund is listed under the category of Investment Grade Bonds.

But according to the company’s own website, the fund has 63% of its bonds in Below Investment Grade bonds.

For the safety of the plan participants, I think there should be some standard or definition for when a bond fund can be called investment grade. I feel that X% of the portfolio needs to be in investment grade bonds; I don’t know what that percentage is, but to me when only 37% is investment grade and 63% is below investment grade, it shouldn’t qualify for the Investment Grade Bond label.

When I asked a plan representative about this, his response was “We give them paperwork. They know what they’re getting themselves into.” Needless to say, it was a pathetic answer and one that made my blood boil. Yet I wasn’t surprised.

I think this is a huge red flag. What are your thoughts?

Ric: I share your angst. SEC regulations permit a fund to call itself something so long as at least 80% of the fund is invested in that way. But I doubt most consumers would be happy to learn that their “government bond fund” has 20% of its assets in junk bonds or that their “stock fund” has 20% of its assets in cash.

Indeed, mutual fund names can be very misleading. That’s why I named this as one of the 25 deceptive business practices of the retail mutual fund industry in my award-winning book The Lies About Money. I wrote that in 2005, and it’s a shame that problem still exists.

Talk with a Financial Advisor

No Cost. No Obligation.

Single Step Form Articles

  • What is the approximate value of all your investments and savings, not including your home or other real estate? Investments and savings include your retirement accounts, stocks and bonds, funds and savings accounts. We can help you move your financial life forward no matter where you are in your journey.

By clicking submit you are agreeing to our Terms of Use and Privacy Policy.

Schedule Your Free, No Obligation Consultation

You May Also Like:

  • woman driving a car
    Article
    Auto Insurance Premiums Unexpectedly Going Up?
    Read More
  • Man holds miniature house in hands
    Article
    Q&A: How Do You Account for Risk With a Big, Long Mortgage?
    Read More
  • Holiday Themed Shopping Bag
    Article
    3 Tips to Avoid Overspending This Holiday Season
    Read More