The types of risk in fixed income funds are many: interest rate/volatility risk, credit risk, counterparty risk, concentration risk, liquidity risk, etc. But the two major risks, going by the history of fixed income funds, are market/interest rate and credit risks. There are mitigants for all types of risk, and there are two types of mitigants for these. They may sound simplistic, but are effective.
Let’s start with volatility or market risk. There is a one-to-one correspondence between the maturity or duration of the bond/bond fund and market risk: higher the duration, higher the risk. This is not the case in other asset classes like equity/commodities, as there is no defined maturity. What if you just reduce the duration in your portfolio to reduce volatility risk? In mutual fund parlance, if you stick to short duration funds as against long duration funds, what is the downside?
