Why invest outside the index? We believe that's where today's best opportunities are.
For more than 25 years, declining interest rates have driven prices in the bond markets higher, leading to strong returns for investors. But with interest rates today at historically low levels, investors can't count on further declines to drive future returns.
What happens when interest rates rise?
Bond prices and interest rates generally move in opposite directions – when rates rise, the value of existing bonds declines. The degree of a bond's sensitivity to those interest-rate changes is measured by duration. Expected volatility in rates poses trouble for duration-orientated bond indexes. See how some of Putnam strategies have reduced this risk.
Because today's low rates offer so little income to offset any price declines, even a small increase in rates could lead to significant losses for certain types of fixed-income securities.
Sources: U.S. Department of the Treasury, Federal Reserve, as of 9/30/13.
Past performance is no guarantee of future results.
Consider these risks before investing: International investing involves currency, economic, and political risks. Emerging-market securities carry illiquidity and volatility risks. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk and the risk that they may increase in value less when interest rates decline and decline in value more when interest rates rise. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is greater for longer-term bonds, and credit risk is greater for below-investment-grade bonds. Risks associated with derivatives include increased investment exposure (which may be considered leverage) and, in the case of over-the-counter instruments, the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Unlike bonds, funds that invest in bonds have fees and expenses. Bond prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific issuer or industry. You can lose money by investing in the fund.