Okay after last week’s article on DBS SaveUp Portfolio (a 5.0% yield bond portfolio).
I have been getting a TON of questions on how do bond funds work, what are the potential risks, exit strategy etc.
So as promised, I wanted to do an article to share more details.
I’ve been writing quite a few Q&A articles for FH Premium members on my views on bond funds and how they work.
What we’ll do today, is to extract some of those questions in a Q&A format below, and hopefully it would clear up any burning queries you have on bond funds (full list of Q&A is on FH Premium).
I’ve organised the Q&A into a few big categories (I suggest reading in order):
- Basics – How do bond funds work?
- Advanced – How do mark to market losses work for a bond fund?
- What is my exit strategy for bonds?
- What are the potential bond funds to consider? How to buy?

Basics: How do Bond Funds work?
Reader Question – How do bond funds work?
Having invested in equities and Mmf for many years but bond investing is totally new to me.. may I know how it works ? Thanks in advanced for answering the “noob” questions below
1. Let’s say I invest 10k into it ? Do I get a certain number of units based on the last closing price ? Where can I find the daily closing bond prices for it?
2. Can I sell the bonds at any time or do I need to wait for the bond to mature ?
3 it is mentioned that yield-to-maturity (DBS SaveUp) stood at 5.0%, with a duration of about 2.0 years.
which date does the 2 yr duration start and when is the maturity date ?
FH Response:
Let me answer each question:
1. Let’s say I invest 10k into it ? Do I get a certain number of units based on the last closing price ? Where can I find the daily closing bond prices for it?
Yes, you will get x number of units based on the last closing price.
Last closing price can be found via the platform you buy it on (eg. DBS, Endowus, FSMOne, POEMS etc), or by doing a google search to find the public NAV.
2. Can I sell the bonds at any time or do I need to wait for the bond to mature ?
Yes, you can sell the bonds at any time, but the amount you get back will be based on NAV at the time of sale (ie. There may be mark to market loss / gain based on market interest rates – more on this later).
3 it is mentioned that yield-to-maturity (DBS SaveUp) stood at 5.0%, with a duration of about 2.0 years.
which date does the 2 yr duration start and when is the maturity date ?
3. This is portfolio yield to maturity and duration. Ie. It is a snapshot on the day at which the metrics was taken, which is end Aug for the numbers above.
Because these are bond funds, when the bonds mature and the principal is returned, they are automatically invested into new bonds.
This is a big difference between bond funds and buying bonds yourself – because a bond fund will automatically reinvest the cash into new bonds at prevailing market price.
Whereas if you hold the bonds yourself you have the option to hold to maturity and get the principal back in full (then decide what you want to do with the cash).
With a bond fund the only way to cash out in full is to redeem your units in the fund (redeemed at NAV).
Reader Question – Why do you suffer Capital losses (or gains) on Bond funds?
Buying the DBS SaveUp means we can only close it when we dont want to stay with it anymore? Also a beginner in bonds so pardon my question
Adding on to this, if I open the SaveUp portfolio today, does it mean that the portfolio will be closed in 2 years? (average duration of the bonds are 2 years)
FH Response:
As per above, you can redeem the units any time, and you will get “paid” based on fund NAV on that date.
Why do you suffer Capital losses (or gains) on Bond funds?
The problem of course, is that bond prices trade inversely to interest rates.
In plain English – this means that when interest rates go up, bond prices go down, and vice versa.
To give a simple example.
Let’s say you buy a Bond portfolio for $100 when interest rates are at 4%.
If interest rates go down to 3.0% and you redeem, you may get back $105 because the bond prices have gone up (inverse to interest rates).
If interest rates go up to 5.0% and you redeem everything, you may get back $95 because bond prices have gone down (inverse to interest rates).
(these are rough numbers so bear with me).
But note that this is a mark to market loss.
So for those of you who buy $100 in bond funds and see only $99.5 today, this mark to market loss is what you are seeing.
Importance of using short duration bonds
But again, note that this is a mark to market loss.
If you continue holding onto the bond funds, then technically you do not “realise” the mark to market loss.
And let’s say you buy a bond portfolio with an average duration of 2 years.
If you choose to hold for 2 years, then technically all the bonds would have “matured” and rolled over into new bonds – effectively erasing the mark to market loss.
This is why I say that shorter maturity bonds are less punishing when interest rates go up, because (a) you suffer a smaller capital loss, and (b) the duration is short enough that you can continue holding and let the underlying bonds mature (erasing the mark to market loss).
Whereas if you buy 10 year bonds, you need to wait 10 years for that to happen, which is a very long time.
This is a key reason why I prefer shorter duration bonds today, with all the uncertainty over where long term interest rates are headed.
But… Bond proceeds are reinvested upon maturity
But to answer the questions specifically – when the underlying bonds mature, they are automatically reinvested by the fund manager into new bonds.
So if you hold the bond funds for 2 years, it will continually reinvest in new bonds and there is technically no “maturity” date.
The only way out is to redeem the units in the bond fund, and the price you get back is based on NAV, hence the importance of the whole discussion above on mark to market losses.
Advanced: How do mark to market losses work for a bond fund?
Reader Question – How do mark to market losses work for a bond fund?
Hi FH and all, just some sharing regardg my experience on recent purchase of Syfe Income+ Preserve.
I bought the bond fund on 25/09 last month and currently already down -1.2% from my initial investment (-0.73% if include dividend received)
I am still trying to figure out how all these low risk bond funds work, in this case despite its stated A+ credit quality & current reducing interest rate environment.
Perhaps FH or anyone can advise if this is norm, also how the mechanism work. Many thanks..
Reader response – Mark to market losses on a bond fund?
This was the response from another reader:
It’s probably due to the jobs report causing interest rates cut expectation to drop. less interest rate cuts = yields up = bonds prices drop. see TLT dropping like a rock.
syfe will count both the capital gains/loss (bond prices) and the ‘dividends’ .
I’m in both the bond funds for a year and I’m up roughly around 5% from bonds prices, and 5% from dividends (reinvested).
The way I see it, buying it is in a way, “locking in” the current yield. So if interest rate cuts, you are compensated with some capital gains, if interest rate remains high, you enjoy your ‘dividends’.
FH Response:
The second reader above is absolutely right.
If you’ve followed the discussion above, you’ll understand that the price quoted to you on a daily basis is based on fund NAV (net asset value).
And the fund NAV fluctuates daily based on the price of the bonds on the open market, which itself depends on market interest rates.
So let’s say you buy a bond fund in Sep when the US 2 year yield was at 3.6%.
Now that 2 year yields have gone up to 3.96%, you would be sitting on mark to market losses.
But of course the short duration nature of the bonds means that the capital loss is not as big (as compared to if you were buying 10 year bonds).
This is known as convexity in Bond lingo, and is why you buy long term bonds as a way to bet on interest rates going down (but I don’t want to overcomplicate the discussion today).

But per discussion above, this is just a mark to market loss.
If you are buying bonds with an average duration of 2 years, theoretically speaking if you hold for 2 years the entire bond portfolio would have matured, practically erasing the mark to market loss.
Questions from Readers – What is my “exit strategy” for bonds?
@Financial_Horse, thank you for this article (and previous articles of course). This is definitely very helpful for a bond fund novice like me.
Your article mentioned that now is a good time to invest in bonds. Just wondering if you will be touching on the “exit strategy” in your subsequent article? What would you (as an experienced bond investor) look out for when it comes to selling them? Will it mainly be the “opposite” of current rate cut cycle, ie, rate hike?
Can @Financial_Horse also share some exit strategies to this? If we see interest rate environment on the rise, should we exit this bond fund and place our money back into other areas?
FH Response:
The way I see it, short/intermediate duration bonds (which I define as about 2 – 4 years duration) – are a hybrid between cash and REITs/long duration bonds.
They are longer duration and higher risk than cash instruments like T-Bills or Fixed Deposit.
And yet shorter duration and lower risk than equity investments like REITs or junk bonds or long duration (10 year+) bonds.
Because of that, I am fine to holds these bonds for the yield, until such time as macro conditions change or I want the cash back.
But to answer the question specifically.
My “exit strategy” will come in 2 forms:
- Interest rates drop and I am sitting on capital gains
- I need the cash (whether it is to deploy into other asset classes, or whether I find other investments more attractive)
Scenario 1 – Interest rates drop and I am sitting on capital gains
This point merits some discussion because as you would all be aware, the opposite is now happening – interest rates are going up.
Why are interest rates going up?
This largely comes down to 2 factors:
- Inflation remains sticky, economy remains resilient
- Probability of Trump victory has gone up
Inflation remains sticky, economy remains resilient
The first is that latest economic data suggests that inflation remains sticky, that the economy may be more resilient than expected.
Viewed this way, Jerome Powell’s 50 bps rate cut in Sep looks like a mistake in hindsight, because by “showing his hand” and prioritising unemployment over inflation, this allowed the market to “call his bluff”.
Market realised that Powell was focussing on stimulating the economy, and started to price in higher inflation in 2025, sending long term interest rates up.
Just look at how everything from stocks to crypto is rallying, and it suggests that the chance of inflation coming back in 2025 has moved up materially (which is why I upped my probabilities for 2025 inflation as shared in the recent articles).
Probability of Trump victory has gone up
Whether you agree with this or not, the fact is that the market is pricing in higher odds of a Trump victory (Trump trades like Crypto, Small Caps, Banks are rallying).
Now if Trump does win in 3 weeks time, what he is likely to do is some combination of:
- Large fiscal spending
- Trade barriers against key trading partners
- Tax cuts
- Deregulation
All of which is inflationary in nature.
These 2 factors combined has led the markets to pricing in sharply higher interest rates due to the possibility of higher inflation.
You can see how the US10Y has retraced almost all of its rate cut decline (and then some):

What does this mean for short duration bonds?
But hey that’s the benefit of short duration bonds.
With the US 2year at about 4% today, realistically you should be able to get 5%ish on an IG bond fund (hedged to SGD).
And yet if interest rates go up, while you will suffer capital losses, it won’t be as big as a long duration (10 year+ bond), and you can “wait” it out by holding.
Let’s game out the various scenarios.
Soft Landing / Inflation – Interest Rates go up
In a soft landing / inflation scenario, the US economy remains strong in 2025, so default rates would be close to zero and I get to collect the 5% dividend yield.
Question then is how high will interest rates go, and how much capital losses would I see on these bonds (from higher interest rates).
As shared in Monday’s article, I think 5% on the US10 year yield is the line in the sand, and anytime the 10 year goes near there it triggers a market risk off and policy intervention.

So worst case in this scenario I would add to bonds at the 4.5-5% mark, and continue holding them for the yield (or capital gains), as I would expect policy makers to eventually step in (the 10 year at 5% would wreak havoc for asset prices).
Recession – Interest Rates go down
If interest rates go down?
Then I’m sitting on capital gains, and I may decide to lock in the profit depending on how low rates go.
How low rates can go is not an easy call, as much will depend on how the path for unemployment / inflation plays out.
I would say if the 2 year drops to 2.5 – 3% ish, I’m probably selling all the bonds and rotating into other assets.

Scenario 2 – I need the cash (whether it is to deploy into other asset classes, or whether I find other investments more attractive)
The second one is more self-explanatory.
If I think I can get more attractive returns elsewhere, I may sell these bonds and buy the other asset class instead.
Reader Question – But Druckenmiller is short bonds…:
Drunkermiller is short on bonds after 50bs cut he said. Citing favourable risk reward alluding to the fact that Fed may get it wrong on inflation. Not saying he is right or wrong ; I am not that smart and informed. Just stating he went on tv and said that.
FH Response:
I watched the interview as well, good one (full video here).
Nuance I would add is that he is short the long end of the curve (10 years+). And I agree that the 10 year at 4% today is not a compelling buy for me, with inflation risk on the horizon.
With 2 – 4 years duration, it becomes much less a rates play and much more about locking in current yields (2 – 4 years is typically only a macro rates play if you throw in a lot of leverage, which is not what I’m looking to do here).
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Questions from Readers – What are the potential bond funds to consider? How to buy?
Reader Question – PIMCO Income Fund?
What about considering PIMCO Income Fund SGD-H with forward rates of 6.3% ?
FH Response:
At this point it’s worth discussing what are the potential options you can consider for Bond Funds.
At a high level, they are:
- DBS SaveUp Portfolio (approx. 5.0% yield, 2 years duration)
- Endowus Income (approx. 5.0% yield, 4 years duration)
- Syfe Income (approx. 5.0% yield, 4 years duration)
- Picking individual bond funds (eg. PIMCO GIS Income Fund SGD Class) (approx. 5 – 6% yield, 4 years duration)
I’m planning to do a full article on PIMCO Income Fund as quite a lot of you have been asking.
I myself am invested in PIMCO Income Fund.
The biggest difference I would between them is duration + underlying exposure.
For eg. The DBS SaveUp is about 2 years duration, the Endowus/Syfe/PIMCO funds average about 4 years duration.
So if interest rates go up, the PIMCO fund would see bigger mark to market losses (but conversely more upside if rates go down).
With longer duration – you also get to “lock in” yields for longer assuming rates continue to get cut.
And of course underlying bonds are also different in terms of geographical/industry exposure.
For eg. SaveUp has exposure to Asian bonds, while the PIMCO funds are typically pure US (although depending on which PIMCO Bond fund you pick there could be Asian credit exposure as well), and Endowus/Syfe tends to be a mix.
Note that PIMCO Income Fund is one of the key constituents of the DBS SaveUp / Syfe / Endowus portfolios as well.
But this is obviously a huge generalisation, and much more discussion is required if you want to go into the weeds.
Reader Question – On duration, and whether to DCA or Lump Sum?
Silly questions as I don’t have experience in investing in bonds.
By duration, I am assuming that an investor holds on to the bond fund for 2 years, then sell it.
Also, would you DCA into a bond fund like above or do a lump sum? If you DCA, wouldn’t the duration of holding it become longer?
Mainly dca but amounts vary depending on price, ie, if there’s a dip, the amount is larger.
But wouldn’t it be slightly different for bond funds as there’s a duration element to it?
FH Response:
Duration of the bonds
As shared above, with bond funds the maturing funds are automatically reinvested into new bonds.
So the 2 year duration will continue to roll throughout the lifespan of the bond fund.
This is not buying bonds directly, where the money will be paid to you on maturity.
Whether to DCA or Lump Sum?
It goes back to the discussion above that if you buy at 4.0% interest rates and interest rates go up to 5.0%, you will sit on capital losses.
Whereas if you buy at 4.0% and rates go to 3.0% you look like a genius.
So there is some timing element to this as well, in that ideally you want to deploy when interest rates are high (even with T-Bills – you make more when you buy the T-Bills at 4.0% yield than when you buy at 3.0% yield).
But of course it’s back to the age old debate on market timing, in that some investors prefer to just dollar cost average rather than time the market.
There is no right or wrong here, and I would say that the benefit with short duration bonds is that because duration is short, you don’t suffer as big a loss even if you get timing wrong.

What I would add – I suggest investors think of these bonds is like a middle ground between T-Bills and REITs.
You don’t want to lump sum as much as T-Bills because there is possibility of capital losses, so you do want to spread it out somewhat, and the timing of your purchases matter (you want to buy when rates are high).
But DCA-ing into Bonds to the extent as you would a REIT/Stock is probably excessive in my view.
A middle ground between the two is the right approach in my view.
How to buy a bond fund? Which is the cheapest platform?
There’s broadly 2 options:
- Buy via Endowus, Syfe, FSMOne, Bond Supermart etc
- Buy via your private banker
In my experience (1) usually tends to be cheaper than (2), but it does vary depending on the fund in question and the promotion in play.
And within (1), Endowus tends to be quite competitive because of the trailer fee rebate, but again it really depends on the fund (some are be cheaper on FSMOne / Bond Supermart).
So f you know exactly which fund you are buying, and are buying a large amount, it’s worth just doing a quick comparison across platforms before you buy (check that it’s the same share class).
It’s messy and imperfect I know, but that’s just how it works today.
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Summing it all up: Are Bond Funds a good buy? Vs buying individual Bonds?
Okay as you can see there are a lot of questions on bond funds coming in.
And I hope that by collating the bigger questions and responding to them at one go, it gives you a better picture of how these bond funds work.
Taking a step back – the fundamental problem is that as a retail investor, you cannot build a diversified portfolio of investment grade bonds cost effectively (minimum investment amount of $250,000 per bond).
So the compromise solution is to use a bond fund to get that diversified exposure.
But when you use a bond fund, all the maturing bonds are automatically reinvested into new bonds.
So unlike a T-Bill, you cannot simply hold to maturity and get all your money back.
The only way “out” is to redeem from the bond fund, in which case you will be repaid at NAV – which depends on where interest rates are at the point of redemption.
So that’s an added layer of complexity with these bond funds.
But hey – ultimately the risk free rate is 2.75% on a 2 year government bond (it’s not accurate to compare vs a 6-month T-Bill because you don’t know where interest rates will be in 2025).
So if you think these bond funds are too much work and not worth the risk, just go into a risk free government bond instead.

My personal views on bonds? It’s all about risk-reward
My personal view, is that it’s all about risk-reward.
It is for this exact reason that I advocate building exposure at the short duration bond space, and not the long duration bond space.
If I buy bonds with a 2 – 4 year duration.
If there is indeed a soft landing, default rates will be close to zero, so I collect my 5%+ yield the next few years.
Sure if interest rates go to 5.0% I may suffer capital losses, but given the short duration nature of the bonds those losses will be manageable, and go away the longer I hold the bond funds.
If there is a hard landing, interest rates will get slashed, and there is capital gains potential on these bonds.
The complexity is that in a recession there is default risk for the underlying bonds, but I would say if you’re playing in Investment Grade credit I *think* the defaults will be manageable barring a bad recession.
But of course there is risk, and there is no free lunch in this world.
From a portfolio perspective, the way I see it, with the Feds on a rate cut cycle, it makes sense to shift some funds out of cash and into short duration bond funds.
But I want a mix of both short term cash instruments (<12 month duration) and short term bonds, to cater for a wide range of outcomes.
Now it’s been a very long article, but I wanted to focus on getting this right to help everyone understand how these bond funds work.
If there are any follow up queries, please do not hesitate to leave a comment below!
This is a modified version of a FH Premium post and will not be updated going forward.
My latest macro views on Bonds are shared on FH Premium, together with the stocks / REITs I am buying.
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Hi FH,
Some comments with respect to your article above. Duration of a bond fund can only taken as a guide. It doesn’t mean that the fund manager will hold all the bonds in the fund till maturity. Just like any fund, the manager can sell a bond before maturity and buy something else. It is part of active management, not passive holding.
You have mentioned a lot about interest rate and also default risk in the article but one of the most important point about bond funds is actually currency. It is very important to get the right currency for your bond funds. For example, if you are a Singapore based investor, it is better to buy a SGD hedged or a bond fund that is substantially invested in SGD papers. Otherwise, your currency losses is going to wipe out whatever gains you have from interest rate movements and also coupons collected from your bonds in the fund.
Hope that the above helps.
Thanks for the great comments ghchua – absolutely spot on again.
Yes I talked about using SGD hedged share class in the previous article so I didn’t mention it so much in here, but you’re absolutely right that FX hedging is critical.
Doesn’t make sense to invest in a 5% bond fund only to lose 10% on FX.
With bonds the upside is capped (unlike equities), so FX is key to watch.
A good exposition and rare piece on the internet. I wish I had someone lay this out 10 years ago to shortcut my learning.
Just to highlight : One advantage of buying from private banker is that you can lever up 2-3X of amount of your captial with a borrowing rate less than the interest rate. This allows you boost the return at some risk (depends on the bond/bond fund you buy) of margin call. caveat emptor.
Conflict of Interest : Vested in PIMCO too.
Thanks for the kind words – that’s a great point that you raised.
The risk I would add is that if the market value of the bonds fall enough, the bank can liquidate your bonds if you don’t meet the margin call in time. Of course I suppose if you’re buying IG credit on say 2-3x leverage, you need a pretty significant mark to market loss for this to happen, but if something like March 2020 or 2008 comes around then all bets are off.
I might also add that for investors with a lot of private property, the other option is to max out the mortgage on those properties instead of borrowing from the bank. The advantage of this is that you cannot be margin called by the bank, and borrowing rates may be even lower (given it’s a mortgage). But downside is the monthly repayments, so it needs some thought around cash flows.
Hi thevaluefund,
What you have said above is not only available when buying from private bankers. Online platforms like FSMOne also offers leverage for bond funds for higher yield and it seems like JPY or JPY hedged funds are popular as borrowing cost for JPY is cheaper.
Peronsally, I don’t recommend leverage on bond funds as the purpose of having bonds in your portfolio is for peace of mind, and not to increase the risk for higher yield.
Hi thevaluefund,
You can leverage on your bond funds not only with your private banker. Online platforms like FSMOne also provide this service. The most “popular” trade now is to leverage on JPY for JPY or JPY hedged funds.
Personally, I don’t advocate doing that. I mean, what is the purpose of buying bond funds in the first place? It is for lower risk. And if you are leveraging on the lower risk portion of your portfolio, you are basically adding additional risk which doesn’t make sense for a low risk portfolio. If one wants higher return/yield, it is better to focus on the higher risk portion of your portfolio and add more to your stocks/REITs/equity funds.
If DBS Saveup is offering 5% with 2 year duration, why bother with the other bond fund giving similar 5% but on longer 4 year duration?
There seems to be some mispricing here or DBS Saveup is taking on inordinately higher risk ?
Yield curve is flat from the 2 – 5 year mark. So this is what the market is pricing in – it’s a personal choice how much duration you want to take.
The more duration you take, the more you make if yields go down, the more you lose if yields go up.
What do you think of ETFs? If I wanted a passive option, what would you recommend?
I recall LQDE LN (Ishares US Corp Bond London UCITS) is quite popular, as it gets around the witholding tax issue. Am I correct on this?
What other alternatives are there?
If you want to use an ETF, you need to be careful with the withholding tax, which is an ETF by ETF level analysis. Even if its LSE listed you need to check the US -> Ireland leg.
I’ve not looked into LQDE myself, so cannot confirm.