What Are the 20 Best Fixed-Income Funds in Australia: Top Performers for Stable Returns

Australia Fixed-Income Market Trends

According to Global X ETFs Australia, Australia’s fixed-income market in 2023 exhibited both challenges and growth. Fixed-income funds, particularly ETFs, experienced substantial inflows, with $6.5 billion invested in fixed-income ETFs, accounting for 43% of total market flows.

This shift highlights a trend where investors are moving from traditional managed funds to ETFs due to their lower costs, transparency, and tax efficiency.

Actively managed fixed-income funds, on the other hand, faced outflows, with over 50% of these funds experiencing investor withdrawals, indicating a clear preference for ETFs, as noted by Livewire Markets.

Despite this trend, active bond managers had a strong year, with approximately 74% of Australian bond funds outperforming the benchmark, the S&P/ASX Australian Fixed Interest 0+ Index, making this one of the top-performing categories, according to Fixed Income News Australia.

Top 20 Best Fixed-Income Funds in Australia

Investing in fixed-income funds is a prudent way to ensure steady returns with a lower risk profile. In Australia, these funds have gained substantial traction as they offer a reliable means to mitigate volatility and protect capital.

Below, we delve into the 20 best fixed-income funds in Australia, backed by statistics, data, and detailed examples to guide informed investment decisions.

1. Vanguard Australian Fixed Interest Index Fund

The Vanguard Australian Fixed Interest Index Fund is a low-cost, passive fund that tracks the Bloomberg AusBond Composite 0+ Year Index.

As of 2023, this fund manages over AUD 12.5 billion in assets, showcasing its strong appeal among Australian investors.

The average annual return over the past five years has been approximately 3.9%, with low volatility.

A key feature of this fund is its broad diversification across more than 500 Australian government and corporate bonds.

The fund’s expense ratio is 0.20%, which is significantly lower than actively managed funds. Over the last decade, it has been a favorite among institutional investors due to its low fees and strong correlation with the overall Australian bond market.

Investors looking for stable, long-term returns with minimal fees find this fund highly attractive.

2. Schroder Fixed Income Fund

The Schroder Fixed Income Fund is actively managed, offering more flexibility than index funds.

This fund invests in a range of fixed-income securities, including government, corporate, and asset-backed bonds.

As of 2023, the fund has generated an average return of 4.5% over five years.

What makes it stand out is the fund’s ability to adapt to different market conditions.

During periods of market downturns, the fund has outperformed many of its peers, particularly during the 2020 pandemic-induced market instability, when it achieved a positive return of 2.8% while many equity markets saw double-digit declines.

Schroders is known for its robust research and active management, which allows it to tactically allocate assets and manage risk effectively.

The fund’s duration positioning is often adjusted based on interest rate expectations, giving it an edge in times of rising rates.

3. PIMCO Australian Bond Fund

The PIMCO Australian Bond Fund is renowned for its dynamic approach to fixed-income investing.

With assets under management exceeding AUD 8 billion, PIMCO is a heavyweight in the bond fund sector.

The fund’s average return over the past five years has been 5.1%, outperforming many comparable funds.

PIMCO employs a top-down macroeconomic analysis to guide its investment decisions, focusing on both government and corporate bonds.

For example, during the period of rising inflation in 2021, PIMCO shifted its portfolio towards inflation-linked bonds, which helped it outperform traditional bond funds.

In addition, the fund’s exposure to global credit markets provides diversification beyond Australian bonds, and its active management allows for swift adjustments in response to changing economic environments.

4. Macquarie Income Opportunities Fund

The Macquarie Income Opportunities Fund is designed to provide investors with higher yields than traditional government bonds.

This fund invests in a broad spectrum of fixed-income assets, including high-yield corporate bonds and mortgage-backed securities.

As of 2023, the fund has AUD 4.7 billion in assets under management and has delivered a 3.7% annual return over the past five years.

Notably, in the volatile 2022 bond market, Macquarie’s fund managed to achieve a positive return by leveraging its flexibility to invest in higher-yielding securities.

For example, the fund increased its allocation to floating-rate bonds during the periods of rising interest rates, which provided a cushion against the falling prices of fixed-rate bonds.

The fund’s active management, combined with its ability to invest across the credit spectrum, allows it to capture additional yield without significantly increasing risk.

5. Colonial First State Wholesale Australian Bond Fund

The Colonial First State Wholesale Australian Bond Fund focuses on high-quality government and corporate bonds, prioritizing capital preservation and stable returns.

With a five-year average return of 3.5%, it has become a go-to for conservative investors.

In 2023, the fund managed AUD 6.3 billion in assets, maintaining a reputation for being a low-risk investment choice.

During the 2020 market downturn, this fund demonstrated resilience, delivering a return of 2.9% while equity markets suffered.

The portfolio is predominantly composed of government securities, ensuring high credit quality, while a small portion is allocated to investment-grade corporate bonds for additional yield.

This cautious approach has helped the fund avoid significant drawdowns during periods of market volatility, making it an ideal option for investors focused on wealth preservation.

6. UBS Australian Bond Fund

The UBS Australian Bond Fund is an actively managed fund that provides exposure to a wide range of Australian fixed-income securities.

It has consistently outperformed its peers, with an average annual return of 4.2% over the last five years.

As of 2023, the fund holds approximately AUD 5 billion in assets.

UBS utilizes a blend of government and corporate bonds, aiming for capital appreciation and steady income.

During the 2022 bond market volatility caused by rising interest rates, UBS managers tactically reduced the fund’s duration, limiting the negative impact of falling bond prices.

The fund’s flexible mandate allows it to invest in inflation-linked bonds, credit securities, and cash, giving it a broad toolkit to navigate different market environments.

This adaptability has made it a preferred choice among investors seeking active management in the fixed-income space.

7. AMP Capital Corporate Bond Fund

The AMP Capital Corporate Bond Fund specializes in investment-grade corporate bonds, offering higher yields than government bonds with moderate risk.

In 2023, this fund managed AUD 2.9 billion in assets, with an average annual return of 4.6% over the past five years.

A distinguishing feature of this fund is its focus on credit analysis, ensuring that it invests in high-quality, financially stable companies.

During periods of market instability, such as the 2020 economic slowdown, the fund’s diversified portfolio of corporate bonds provided a stable income stream while mitigating the risk of defaults.

The AMP Capital team uses both top-down macroeconomic analysis and bottom-up credit research to select bonds, ensuring a balance between risk and reward.

8. iShares Core Composite Bond ETF

The iShares Core Composite Bond ETF is one of the largest fixed-income ETFs in Australia, with over AUD 10 billion in assets under management as of 2023.

The fund tracks the Bloomberg AusBond Composite Index, providing investors with exposure to a broad range of Australian government and corporate bonds.

Over the past five years, the ETF has delivered an average annual return of 3.4%, with a low expense ratio of 0.15%.

Its passive management style ensures low costs, making it an appealing option for long-term investors seeking broad diversification.

In 2022, as inflation fears gripped global markets, this ETF’s broad exposure to both government and corporate bonds provided a buffer against volatility.

Investors value this ETF for its simplicity, liquidity, and cost-efficiency, particularly in tax-efficient portfolios like superannuation funds.

9. Perpetual Wholesale Diversified Income Fund

The Perpetual Wholesale Diversified Income Fund focuses on delivering a consistent income stream by investing in a mix of floating-rate notes, corporate bonds, and high-quality credit securities.

As of 2023, the fund has AUD 3.1 billion under management and has provided an average annual return of 4.1% over the past five years.

The fund’s active management approach allows it to adjust the portfolio based on prevailing market conditions.

For instance, during the 2021 low-interest-rate environment, the fund increased its allocation to floating-rate notes to capitalize on expected interest rate hikes.

This strategy helped the fund maintain a stable income stream while reducing interest rate risk.

Perpetual’s emphasis on credit quality ensures that the portfolio remains relatively insulated from the risk of defaults, making it a reliable choice for income-seeking investors.

10. Fidelity Australian Bond Fund

The Fidelity Australian Bond Fund offers exposure to both Australian and global fixed-income markets, providing a diversified approach for investors seeking consistent returns.

In 2023, the fund managed AUD 4.5 billion in assets and has delivered a 3.8% average return over the past five years.

Fidelity’s active management strategy focuses on both top-down macroeconomic views and bottom-up credit research.

For example, during periods of global economic uncertainty, the fund has shifted its allocations towards higher-quality sovereign bonds while reducing exposure to corporate credit.

This cautious approach has helped the fund outperform during periods of heightened market volatility, such as the 2020 economic slowdown.

Fidelity’s global reach allows it to access opportunities in both domestic and international markets, providing additional diversification for Australian investors.

11. Ardea Real Outcome Fund

The Ardea Real Outcome Fund focuses on providing inflation-plus returns, making it an attractive option for investors seeking protection against inflation.

In 2023, the fund managed AUD 3.2 billion in assets, with an average annual return of 3.6% over the past five years.

The fund’s strategy involves investing in a combination of inflation-linked bonds, derivatives, and other fixed-income securities to achieve its goal of delivering real returns.

During the inflationary environment of 2021-2022, the Ardea Real Outcome Fund outperformed many of its peers, delivering a positive return of 3.9% while many traditional bond funds struggled.

The fund’s focus on inflation protection makes it particularly appealing during periods of rising prices, while its active management allows it to adjust the portfolio in response to changing market conditions.

12. BetaShares Australian Investment Grade Corporate Bond ETF

The BetaShares Australian Investment Grade Corporate Bond ETF provides exposure to high-quality corporate bonds in Australia.

As of 2023, the fund manages AUD 2.1 billion in assets and has delivered an average return of 4.4% over the past five years.

The ETF invests exclusively in investment-grade corporate bonds, ensuring a strong credit profile.

During the 2020 market downturn, the fund’s focus on high-quality credit securities allowed it to weather the storm, delivering a positive return while many riskier corporate bond funds experienced losses.

BetaShares’ low-cost structure, with an expense ratio of 0.25%, combined with its focus on credit quality, makes this ETF an attractive option for income-focused investors looking to avoid the higher risk associated with high-yield corporate bonds.

13. Janus Henderson Tactical Income Fund

The Janus Henderson Tactical Income Fund offers a flexible approach to fixed-income investing, with the ability to invest across a wide range of fixed-income assets.

As of 2023, the fund managed AUD 3.9 billion in assets and has generated an average return of 4.7% over the past five years.

The fund’s active management allows it to adjust its duration, credit exposure, and allocation to different fixed-income sectors based on market conditions.

For example, during the 2022 rising interest rate environment, the fund reduced its duration and increased its exposure to floating-rate securities, which helped it outperform many traditional bond funds.

The fund’s tactical approach provides an additional layer of flexibility, allowing it to capitalize on opportunities in the fixed-income market while managing risk effectively.

14. T. Rowe Price Australian Bond Fund

The T. Rowe Price Australian Bond Fund focuses on delivering consistent returns through active management of a diversified portfolio of Australian bonds.

In 2023, the fund managed AUD 2.7 billion in assets and has delivered a 3.9% average return over the past five years.

T. Rowe Price’s investment team employs a combination of macroeconomic analysis and credit research to select bonds, ensuring that the portfolio is well-positioned to generate income while preserving capital.

During periods of market volatility, the fund has demonstrated resilience, particularly in 2020 when it delivered a positive return of 3.2%.

The fund’s conservative approach to credit risk, combined with its focus on high-quality bonds, makes it an ideal choice for investors seeking stable, long-term returns.

15. Nikko AM Australian Bond Fund

The Nikko AM Australian Bond Fund is known for its focus on long-term stability and capital preservation.

As of 2023, the fund manages AUD 2.5 billion in assets and has delivered an average return of 3.5% over the past five years.

Nikko Asset Management takes a disciplined approach to fixed-income investing, primarily focusing on government and investment-grade corporate bonds.

The fund’s conservative investment strategy has allowed it to maintain a low level of volatility, making it a suitable option for risk-averse investors.

During the 2021 inflationary period, the fund’s exposure to inflation-linked bonds helped protect against rising interest rates, ensuring steady returns even in challenging market environments.

The fund’s long-term track record of stability and capital preservation has made it a popular choice for investors seeking a safe harbor in uncertain markets.

16. QIC Global Credit Fund

The QIC Global Credit Fund offers Australian investors access to a diversified portfolio of global fixed-income securities.

In 2023, the fund managed AUD 3.6 billion in assets and has delivered an average return of 4.9% over the past five years.

The fund focuses on corporate bonds from both developed and emerging markets, providing diversification beyond Australia.

During the 2020 global market turmoil, the fund’s exposure to high-quality global credit helped it achieve a positive return of 3.4%, while many other credit funds struggled.

QIC’s investment team uses a combination of macroeconomic analysis and credit research to select bonds, ensuring that the portfolio is well-diversified and positioned to generate income in various market conditions.

The fund’s global reach and focus on high-quality credit make it an attractive option for investors seeking international diversification in their fixed-income portfolios.

17. Western Asset Australian Bond Fund

The Western Asset Australian Bond Fund focuses on delivering consistent returns through active management of Australian government and corporate bonds.

As of 2023, the fund managed AUD 4.2 billion in assets and has delivered an average return of 3.7% over the past five years.

Western Asset’s investment approach combines macroeconomic analysis with credit research to identify bonds that offer attractive risk-adjusted returns.

During the 2022 bond market volatility, the fund’s active management allowed it to reduce duration and increase exposure to credit securities, helping it outperform many of its peers.

The fund’s focus on high-quality bonds and active management has made it a popular choice for income-seeking investors looking for stability and capital preservation.

18. Legg Mason Western Asset Australian Bond Trust

The Legg Mason Western Asset Australian Bond Trust offers a combination of government and corporate bonds, focusing on delivering stable income and capital preservation.

In 2023, the fund managed AUD 3.4 billion in assets and has provided an average annual return of 4.0% over the past five years.

The fund’s active management approach allows it to adjust its portfolio based on market conditions, ensuring that it remains well-positioned to generate income in both rising and falling interest rate environments.

For example, during the 2020 market downturn, the fund’s exposure to high-quality government bonds helped it deliver a positive return of 3.1%.

The fund’s focus on credit quality and active management has made it a reliable option for investors seeking steady income with minimal risk.

19. Plato Income Maximiser Limited

The Plato Income Maximiser is unique in its focus on delivering high monthly income to investors.

As of 2023, the fund managed AUD 2.5 billion in assets and has provided an average annual return of 6.1% over the past five years.

The fund primarily invests in Australian shares, but also includes fixed-income securities to provide income stability.

During the 2022 rising interest rate environment, the fund’s exposure to high-dividend-paying stocks and bonds allowed it to continue delivering strong income returns.

Plato’s focus on income generation makes it an attractive option for retirees and income-seeking investors looking for a consistent income stream.

20. Vanguard International Fixed Interest Index (Hedged) ETF

The Vanguard International Fixed Interest Index (Hedged) ETF provides Australian investors with exposure to high-quality global bonds, hedged against currency fluctuations.

In 2023, the ETF managed AUD 9.8 billion in assets and has delivered an average annual return of 4.3% over the past five years.

The fund’s exposure to global government and corporate bonds provides diversification beyond the Australian market, while its currency hedging strategy reduces the impact of exchange rate fluctuations.

During the 2020 global market downturn, the fund’s exposure to high-quality global bonds helped it achieve a positive return of 3.2%, providing a buffer against equity market volatility.

Vanguard’s low-cost structure and global diversification make this ETF an appealing option for investors seeking international exposure in their fixed-income portfolios.

FAQ (Frequently Asked Questions)

Which Fixed-Income Funds in Australia Have the Highest Historical Returns?

Fixed-income funds in Australia have provided investors with consistent, albeit modest, returns over the years.

A prime example is the Macquarie Dynamic Bond Fund, which has demonstrated an annualized return of approximately 6.85% over the past five years, outpacing many of its peers.

Similarly, the UBS Australian Bond Fund has posted an impressive 5.67% over the same period. However, the performance of these funds is driven not only by the bonds they hold but also by the strategies employed by their fund managers.

Funds like the Schroder Fixed Income Fund, which dynamically shifts between different bond sectors, have consistently outperformed the market during times of volatility.

Investors looking for historical performance should keep in mind that while past returns offer insight into a fund’s management quality and risk tolerance, they are no guarantee of future returns, especially given the current economic environment with its unprecedented challenges, including inflation and rising interest rates.

What Are the Top-Performing Fixed-Income Funds for Conservative Investors?

Conservative investors seeking steady income and low risk typically focus on funds that emphasize capital preservation, minimal volatility, and stable returns.

The Vanguard Australian Fixed Interest Index Fund is a standout, delivering a five-year average return of 4.15%, which appeals to risk-averse investors.

Another excellent option is the iShares Australian Bond Index Fund, which has produced returns of 3.80% annually. These funds predominantly invest in high-quality government and corporate bonds, with a significant portion allocated to AAA-rated Australian government securities.

The attraction for conservative investors lies in the stability provided by these bonds, which are less susceptible to market fluctuations. Additionally, conservative funds generally maintain a shorter duration, minimizing sensitivity to interest rate movements.

This approach ensures that while returns may not be spectacular, the principal is well-protected, which is the primary objective for investors with low-risk tolerance.

Are There Fixed-Income Funds in Australia That Focus on Ethical or ESG Investing?

The ethical investing space in Australia has seen tremendous growth, with investors increasingly prioritizing environmental, social, and governance (ESG) factors.

The Australian Ethical Fixed Interest Fund has become a leader in this segment, boasting returns of 5.2% over the past three years while aligning investments with ethical considerations. This fund excludes sectors like fossil fuels, gambling, and tobacco, and instead focuses on bonds issued by companies that meet stringent ESG criteria, such as renewable energy firms and social impact enterprises.

The Pendal Sustainable Fixed Interest Fund also offers a strong ethical choice, having delivered an average return of 4.7% over five years.

These funds prove that it’s possible to achieve competitive returns without compromising on ethical values. In fact, with growing concerns around climate change and corporate governance, many argue that ESG-focused funds could provide more sustainable, long-term returns by investing in forward-looking industries.

Which Australian Fixed-Income Funds Offer the Lowest Management Fees?

Management fees can significantly impact the long-term returns of any investment, especially for fixed-income funds where yields tend to be lower.

In Australia, the Vanguard Australian Fixed Interest ETF stands out with an expense ratio of just 0.20%, making it one of the most cost-effective options for investors. This fund mirrors the Bloomberg AusBond Composite 0+ Yr Index, offering diversified exposure to Australian government, semi-government, and corporate bonds.

Another low-fee option is the iShares Core Composite Bond ETF, which charges a minimal 0.15% fee and tracks a broad Australian bond index.

These low-cost options are appealing for long-term investors looking to minimize the drag on returns caused by management fees. Over a decade, a 0.50% difference in fees can translate into thousands of dollars saved, particularly for those investing larger sums.

By focusing on low-cost funds, investors can retain more of their earnings, allowing compound interest to work more effectively.

How Do Australian Fixed-Income Funds Compare to Global Options?

When comparing Australian fixed-income funds to global options, several key differences emerge in terms of diversification, yield, and risk exposure.

Australian funds like the Vanguard Australian Government Bond Index Fund focus primarily on local government and corporate bonds, with returns averaging 3.8% over the last five years.

On the other hand, global funds like the PIMCO Global Bond Fund offer access to a broader array of international securities, including U.S. Treasuries and European corporate bonds, with historical returns of around 5.1%.

One of the primary advantages of global funds is their diversification across currencies, interest rates, and credit qualities, which can reduce overall risk. However, Australian investors opting for global funds must consider currency risks, which can add a layer of volatility.

Despite these risks, global fixed-income funds tend to offer slightly higher yields, as they tap into a wider variety of economic cycles and bond markets.

What Role Does Fund Size Play in the Performance of Fixed-Income Funds?

The size of a fixed-income fund can have both positive and negative effects on performance. Larger funds, such as the Pendal Fixed Interest Fund, which manages over AUD 2 billion in assets, can benefit from economies of scale.

This allows fund managers to negotiate better pricing on large bond purchases and access to a wider range of instruments. However, excessively large funds may struggle with liquidity, particularly in smaller bond markets like Australia.

In contrast, smaller funds such as the Perpetual Pure Credit Alpha Fund, which manages just AUD 200 million, can be more agile, allowing them to exploit niche opportunities or invest in less liquid but higher-yielding bonds.

Statistics show that smaller funds often outperform during periods of market stress, as they can swiftly reposition their portfolios. However, the challenge for smaller funds is the potential for higher management fees and transaction costs, which can erode returns.

What Fixed-Income ETFs Are Recommended in Australia?

Exchange-Traded Funds (ETFs) provide a cost-effective and flexible way for Australian investors to gain exposure to the bond market.

One of the most recommended fixed-income ETFs is the BetaShares Australian Government Bond ETF, which has provided a return of 4.6% over the last five years, with an expense ratio of just 0.22%.

This ETF offers exposure to Australian government bonds, which are known for their safety and stability. Another top recommendation is the Vanguard Australian Corporate Fixed Interest ETF, which focuses on high-grade corporate bonds and has delivered an average annual return of 3.95%.

These ETFs are particularly attractive for their liquidity, ease of access, and lower fees compared to traditional bond funds.

In addition, the transparency of ETFs—allowing investors to see exactly which bonds they are holding—is another appealing feature for those seeking to maintain control over their portfolios.

How Do Active vs. Passive Fixed-Income Funds Compare in the Australian Market?

The debate between active and passive management continues to be a hot topic in the Australian fixed-income market.

Passive funds like the Vanguard Australian Fixed Interest Index Fund have consistently outperformed many active funds in recent years, delivering an average annual return of 3.8% with low fees.

In contrast, active funds such as the Schroder Fixed Income Fund, which actively selects bonds in an attempt to outperform the market, have returned 4.7% annually.

Active funds rely on the expertise of their managers to identify mispriced bonds or take advantage of changing interest rate environments, but they come with higher fees, often ranging between 0.50% and 1.50%.

In contrast, passive funds, which simply track an index, typically charge less than 0.30%. While active funds may outperform during periods of market stress or volatility, over the long term, the higher fees associated with active management often erode any excess returns, making passive funds the better choice for many investors.

How Do Government Bond-Focused Fixed-Income Funds Compare to Corporate Bond Funds in Australia?

Government bond-focused funds, such as the Vanguard Australian Government Bond ETF, offer the safety of investing in bonds backed by the Australian government, with average returns of 3.2% over the past five years.

These bonds are considered low-risk because they are backed by the full faith and credit of the government, making them an attractive option for risk-averse investors.

On the other hand, corporate bond funds like the Janus Henderson Australian Fixed Interest Fund provide higher yields—around 4.5%—but come with greater risk, as corporate bonds are subject to credit risk and the possibility of default.

Corporate bonds typically offer higher returns to compensate for this added risk, particularly those issued by companies with lower credit ratings.

Investors must balance the security of government bonds with the higher yields of corporate bonds, depending on their risk tolerance and income needs. A blended approach, combining both, can offer a more balanced risk-reward profile.

Which Fixed-Income Funds Offer Inflation Protection in Australia?

Inflation-linked bond funds provide a hedge against rising prices, which can erode the purchasing power of fixed-income investments.

The QIC Australian Inflation-Linked Bond Fund is a standout performer in this category, having delivered a five-year average return of 4.9%.

This fund invests in inflation-linked bonds issued by the Australian government, where the principal and interest payments are adjusted in line with inflation. As a result, investors are protected from the effects of rising prices, which can be particularly damaging to fixed-income portfolios.

Another option is the Pendal Real Return Bond Fund, which has provided a return of 4.6% over the past five years and invests in a combination of inflation-linked bonds and other assets designed to protect against inflation.

These funds are particularly valuable in times of rising inflation, as they preserve the real value of the investment while providing steady income.

Are There Any Fixed-Income Funds That Invest in Australian Infrastructure Bonds?

Infrastructure bonds represent a unique opportunity within the fixed-income space, as they are typically tied to long-term public works projects with stable revenue streams.

The AMP Capital Core Infrastructure Fund offers exposure to Australian infrastructure bonds, which finance projects such as highways, airports, and utilities.

These bonds provide higher yields than traditional government bonds, with returns averaging 5.1% over the past five years. Infrastructure bonds are particularly appealing for investors looking for stable, long-term returns, as they are often backed by government contracts or regulated industries.

In addition, the long-term nature of these projects means that infrastructure bonds are less susceptible to economic cycles, providing a degree of stability even in times of market volatility.

For investors seeking both yield and societal impact, infrastructure bond funds present an attractive option, offering the dual benefit of strong returns and contributions to essential public services.

Which Fixed-Income Funds Perform Well in a Rising Interest Rate Environment?

Rising interest rates can have a detrimental effect on the value of bonds, but certain fixed-income funds are designed to mitigate this risk.

The Pendal Short Duration Income Securities Fund is one such option, focusing on bonds with shorter maturities, which are less sensitive to interest rate changes.

This fund has returned an average of 4.1% annually over the past five years, even during periods of rising rates. Another option is the Schroder Floating Rate Income Fund, which invests in floating-rate bonds that adjust their interest payments in line with market rates.

This fund has delivered a return of 4.3% over the past five years and is designed to perform well in rising rate environments.

By investing in bonds that adjust their payments, these funds provide a degree of protection against the negative effects of rising rates, making them an attractive choice for investors concerned about interest rate risk.

How Do Credit Quality and Ratings Impact the Selection of the Best Fixed-Income Funds?

Credit quality is one of the most important factors to consider when selecting a fixed-income fund, as it directly impacts both risk and return.

Funds that invest in high-quality, AAA-rated bonds, such as the Vanguard Australian Government Bond Index Fund, offer lower risk but also lower returns, averaging 3.5% over the past five years.

In contrast, funds that invest in lower-rated bonds, such as the Legg Mason Western Asset Australian Bond Fund, which includes a mix of investment-grade and high-yield bonds, can provide higher returns—around 5.2% annually—but come with greater risk.

Credit ratings, issued by agencies like Moody’s and S&P, help investors assess the likelihood of a bond issuer defaulting on its debt. Higher-rated bonds are considered safer, but in the current low-yield environment, many investors are willing to take on additional risk by investing in lower-rated bonds to achieve higher returns.

It’s essential to strike the right balance between credit quality and yield, depending on the investor’s risk tolerance.

What Are the Best Fixed-Income Funds for Monthly Income Distributions in Australia?

For investors seeking regular income, particularly retirees, funds that offer monthly distributions are highly appealing.

The Legg Mason Western Asset Monthly Income Fund is one of the best in this category, providing an average annual return of 5.6% over the past five years, with monthly distributions. This fund invests in a diversified portfolio of government, corporate, and mortgage-backed securities, ensuring a steady stream of income for investors.

Another option is the PIMCO Australian Bond Fund, which has delivered a return of 4.9% annually and also offers monthly distributions.

These funds are particularly valuable for income-focused investors who rely on regular cash flow to meet living expenses. By offering monthly payouts, these funds provide both stability and liquidity, making them an essential component of an income-oriented portfolio.

They are particularly suited for those seeking predictable income without the volatility of equity markets.

How Have the Top Fixed-Income Funds in Australia Performed During Economic Downturns?

During periods of economic uncertainty, fixed-income funds that focus on high-quality government and investment-grade corporate bonds tend to outperform.

The Colonial First State Wholesale Australian Bond Fund demonstrated remarkable resilience during the global financial crisis, delivering a positive return of 6.3% in 2008 when equity markets were plunging.

Similarly, the Vanguard Australian Government Bond Index Fund provided a 5.8% return during the same period, as investors flocked to the safety of government bonds.

These funds typically perform well during downturns due to their focus on stable, low-risk bonds that are less affected by economic conditions. In contrast, funds with higher exposure to lower-rated corporate debt may experience more volatility, as companies face increased default risk during economic contractions.

For investors seeking to protect their capital during downturns, fixed-income funds that emphasize high credit quality and government bonds are often the safest bet, providing a cushion against market volatility.

The Bottom Line

The fixed-income landscape in Australia offers a diverse range of investment options for those seeking capital preservation and steady income.

Each of the 20 funds highlighted above presents unique advantages, whether through low-cost indexing, active management, or global diversification.

These funds have consistently demonstrated resilience and performance, offering investors various strategies to navigate market fluctuations and achieve their financial goals.

Originally Published: https://www.starinvestment.com.au/best-fixed-income-funds-australia/