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ICI Supports Call for Realistic Investor Expectations of Bond and Bond Fund Investing

Washington, DC, April 16, 2004 – In a recent  Notice to Members, NASD reminded member firms that sell bonds and bond funds of their sales practice obligations in connection with such products. The NASD reminder reinforces ICI communications urging investors to understand the relationship between today’s historically low interest rates and their effects on bond prices, particularly if rates were to rise.

The Institute’s Investor Awareness series emphasizes the importance of realistic investor expectations of all financial markets and the benefits of diversification in meeting both short- and long-term investment goals.

Background
NASD, a private non-profit regulator of the U.S. securities industry, notes that the number of individual investors purchasing bonds or bond funds has increased dramatically in recent years. According to NASD, bonds and bond funds may be viewed as low-risk, or sometimes even as risk-free, alternatives to equity securities. Purchasers of bonds and bond funds often believe that their principal is safe, they are guaranteed a particular yield on their investment, and bonds are inexpensive to purchase because they do not pay a commission or other acquisition cost on the transaction. As a result, NASD is concerned that many investors may not fully appreciate the risks and costs associated with such products.

“It is the responsibility of firms to take appropriate steps to ensure that their associated persons understand and inform their customers about the risks as well as the rewards of the products they recommend and offer,” states the NASD notice.

ICI Position
In November 2002, Institute President Matthew P. Fink  urged investors to consider the effects of interest rates on bond funds. The Institute also publishes a brochure, A Guide to Bond Mutual Funds, which explains the factors that can cause the value of a bond mutual fund investment to rise or fall.

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