The traditional view of portfolio risk revolves around its divergence from a benchmark – most often the bellwether Barclays U.S. Aggregate Index, or simply the "Agg." This belief is flawed, however, because it ignores how individual securities, found both in and outside the index, can represent different forms and intensities of risk.

At Putnam, we break down the risks of fixed-income investing into four major areas: term structure, credit, prepayment, and liquidity.

When we filter the Agg through this understanding of risk, moreover, we find that the index is heavily tilted toward term-structure risk while the other three risk categories are less well represented or nearly absent.

Nearly 80% of the Agg is government backed, and the vast majority of its performance is driven by interest rates

Traditional allocation by sector when analyzed for portfolio risk reveals risk concentrated in term structure.

Sources: Barclays, Putnam Research, as of 6/30/14.

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.