10 Best Fidelity Low Risk Funds for Retirement

Fidelity Low Risk Funds

With over 70 years of experience in managing investor’s money and over $2.1 trillion mutual funds assets under management, Fidelity plays a pivotal role in helping individuals access investment opportunities in domestic and international money market funds. Fidelity bonds are a great way of managing volatility as they will reduce risk in times such as a recession or during market panics.

What Is a Fidelity Bond?

Fidelity Investments commonly referred to as Fidelity is a financial services company based in Boston, Massachusetts. Fidelity is among the top global asset management companies in the world, known for its specialty in no-load actively managed mutual funds. They also offer Individual Retirement Accounts (IRAs), and 401(k) retirement plans. Fidelity funds cover all mutual fund asset classes, from domestic to specialized sectors.

3 Categories of Fidelity Funds

Fidelity offers a wide variety of high-quality mutual funds to invest in, and you can divide them into the following 3 categories to understand them easily.

They are: Best Balanced Funds, Best Index Funds, and Actively-Managed Funds.

1. Fidelity Actively-Managed Funds

These are funds that allow a portfolio manager the discretion to buy and sell investors stocks. This category of Fidelity Funds is actively managed to help in managing a relative index.  

2. Best Index Funds

This category includes the cheapest index funds that are available in the market. There are more than 30 index funds in this category among which the Fidelity 500 Index Fund (FXAIX) and is one of the best.

3. Balanced Funds

These are a type of Fidelity Funds that invest in a balance of cash, bonds, and stocks, hence the name “balanced”. Funds in this category are a smart investment option for investors looking to invest in only one fund or those who are looking for a solid investment as a foundation for their investing.

10 Best Fidelity Low-Risk Funds for Retirees

1. Fidelity OTC Portfolio (FOCPX)

Fidelity OTC Portfolio is a mutual fund that seeks capital appreciation. Investing in FOCPX involves putting over 80% of assets into securities that principally traded in the OTC (over the counter) or Nasdaq composite market. 

OTC markets have many small and medium-sized companies, a factor which indicates that these markets have an opportunity for growth. This explains why the returns from investments in FOCPX are relatively high. However, FOCPX also gets a low-risk investment rating of above-average because OTC markets have lesser regulation and transparency. 

While FOCPX is a high performer to investors, the fund is not as diversified compared to other index funds. The top 10 holdings in FOCPX amount to over 45% of the whole portfolio and 38% of the whole fund is in the technology sector. The fund is also relatively expensive at a 0.8% expense ratio, which can impact long-term returns.

2. Fidelity BlueChip Growth Fund (FBGRX)

Blue-chip companies with a high potential for growth are a hard find for investors. The Fidelity BlueChip Growth Fund (FBGRX) targets the large S&P 500 companies such as Dow Jones and others.

The management uses these criteria to offer only companies that indicate a growth potential that is above-average. FBGRX heavily inclines in information technology, which makes up 38% of the whole portfolio, and 25% of the portfolio is consumer discretionary. The expense ratio is also high standing at 0.8% and the ten-year average annual returns stand at 18.76%

3. Fidelity Nasdaq Composite Index Fund (FNCMX)

Unlike FOCPX that aims to beat the Nasdaq Composite Index, FNCMX is one of the best retirement funds that just aims to track the index performance. 

Although regarded as a pricey fund due to the 0.3% expense ratio, FNCMX is comparatively affordable for investors looking to invest in Nasdaq. Out of more than 3,000 stocks in the benchmark index, the fund holds 2,089 stocks.

Due to its passivity, the fund cannot take advantage of active bets through paring back sector exposure as FOCPX now does.

The fund is therefore 41% more inclined toward technology, with its top 10 holdings making up 45% of the portfolio. The FNCMX trades names such as Microsoft, Apple, Amazon, Facebook, and Alphabet.

4. Fidelity Contrafund (FCNTX)

FCNTX is a fund that invests in companies that are considered to be undervalued, compared to their growth or revenue prospects.

FCNTX is the largest fund under active management, which has suffered a drop in rankings from no. 95 to no. 209. Despite the drop in rank, and a score of 5.3 out of 10, the Morning Star still sees the value in this fund- hence its silver rating due to its effective approach and successful track record. The fund has a net expense ratio of 0.85% and 15.57% 10-year average annual returns.

5. Fidelity 500 Index Fund (FXAIX)

The FXAIX is offered in more than half of all Fidelity Fund’s 401(k) plans on the Fidelity platform. 

Being one of the best performing and lowest cost retirement funds on Fidelity, the 10-year average annual returns are 13.97%, with a net expense ratio of 0.015%. FXAIX is the lowest-cost mutual fund that tracks the S&P 500.

FXAIX has a gold badge from Morning Star and since it replicates the S&P 500, it’s a great option for index investors and investors looking for exposure.

6. Fidelity Total Market Index Fund (FSKAX)

The Fidelity Total Market Index Fund provides more exposure to the U.S stock market that is broader than S&P funds but for the same price.

FSKAX has nearly 3,500 holdings and goes far beyond the S&P 500 list. FSKAX limits companies on its holdings to those with more than $10 billion market value, making it a large-cap fund.

None of the FSKAX holdings make up more than 5% of the overall portfolio, which prevents overconcentration. 

The fund is a great option for exposure to a broad stock market, and at index fund pricing. The 10-year average annual returns are 13.68% and the net expense ratio is 0.015%. 

7. Fidelity Worldwide Fund (FWWFX)

FWWFX is the best performing Fidelity fund that goes beyond the US. However, 60% of its portfolio is US companies — meaning that FWWFX is not one of the most exposed worldwide funds.

FWWFX gives you exposure to more than 11 countries and does well in keeping the stock weight below 5%. With a 10-year average annual return of 12.% and a 0.99% net expense ratio, FWWFX is quite on the pricey edge for an index fund. Still, its cost is below the category average and the performance is above average.

8. Fidelity Extended Market Index Fund (FSMAX)

FSMAX is a popular fund in the Fidelity 401(k) plans that provide small-cap and medium-cap exposure, which is in low supply among other top-performing Fidelity funds.

FSMAX is benchmarked to the Dow Jones U.S Completion Total Market Index, and this excludes the S&P 500. This makes SFMAX a complementary investment to S&P500 and other large-cap index funds.

It’s highly diversified with over 3,100 holdings, with the top 10 holdings accounting for only 7% of the portfolio. The fund is also attractive to investors as its net expense ratio has dropped from 0.045% to 0.035%.

The ten-year average annual returns are 12.32% and are considered as an above-average in the U.S mid-cap blend category.

9. Fidelity Puritan Fund (FPURX)

As one of the oldest funds in the market, the FPURX is a relaxed approach to retirement investing. FPURX, which was founded in 1947, invests 40% of its portfolio in debt investments and other fixed-income securities such as bonds. These investments mainly include mortgage pass-through securities and investment-grade credit.

Owing to the relaxed and conservative investment, the returns are also conservative at around 10% ten-year average annual returns. The net expense ratio stands at 0.53% with an above-average risk that falls under the Morning Star’s 50%-70% equity category on allocation.

10. Fidelity Zero Expense Ratio Index Funds

The Fidelity Zero Expense Ratio Index Funds are a line up of zero minimum, zero expense index mutual funds.

They include the Fidelity Zero International Index Funds (FZILX), Fidelity Zero Total Market Index Fund (FZROX), Fidelity Zero Extended Market Index (FZIPX), and the Fidelity Zero Large Cap Index Fund (FNILX).

These are nascent funds debuted in 2018 by Fidelity, and they don’t have a performance track record like other funds included in this list. While they may take a while to be included in the 401(k) plans, they are a great retirement investment option as they have no investment minimum or expense ratio to worry about.

Things You Need to Consider Before Buying Fidelity Bonds

1. Have a well-thought-out investing and trading plan

The best way to start investing in Fidelity bonds is by having a long term plan on how you will invest. For a comprehensive investing plan, here are some of the things you should consider:

  • Investing objectives
  • Ability to tolerate risk
  • Time horizons
  • Taxes

These four factors will help you find the types of assets to acquire on your portfolio and the strategy you will employ to accomplish your investment goals. Ensure that your planning also features other unique circumstances that apply to your investing needs. Professional and financial assistance at this stage is important and necessary.

Consider if you want active trading, and how much of your portfolio will you be trading. Professionals advise against the active trading of most of the stocks. However, ensure that you first build a portfolio that is diversified, and which aligns with your risk constraints and investing objectives.

Portfolio diversity means having an asset mix in bonds, stocks, and other investments. Diversification helps in managing your risk.

2. Research Your Ideas Fully and Employ Trading Best Practices

Researching your ideas is important especially if you plan on actively trading part of your portfolio. Here are some of the things to consider when doing your research:

  • Finding new ideas– there are plenty of ways to come up with investing ideas. One of the best places to start is with what you already know. Then you can use the knowledge you have to identify the stocks that you can analyze and study to consider if you want to own them.
  • Start with the basics– the basic factors of an investment opportunity often give a clue as to the performance of the investment over a period. For example, earnings are a basic indicator of how a stock has and will perform over time. Even with short term fluctuations, how the stocks perform will depend on the company’s ability to generate earnings.
  • Understand the technical aspects– Fundamental analysis is helpful in directing whether you buy or sell. Technical analysis shows you “why” you need to buy or sell, and at what price. Technical analysis includes using data to create charts that help you in spotting trends and patterns that will help you with your decision. 

3. Plan for a trade

After doing your basic research, fundamental analysis, and identifying an opportunity, the next step will be choosing a strategy.

Whether it’s selling or buying mutual funds, stocks, bonds, ETFs, or considering advanced buying and selling options, a strategy is necessary.

Back screeners and backtesting software will help you find flaws and you can use this to have an idea of the risks that will come with a particular trading strategy or idea. Testing both short term and long term strategies may also be necessary.

Just as there are risks involved in every investment opportunity, all trading strategies have a risk that you should know beforehand.

Entry and exit trading strategies are an important tool in succeeding in all your trades. An entry strategy, for example, can help you handle volatility in case things change in between the time you decide to trade.

An exit strategy can also help you make the right move. Emotions can stand in the way of information-driven, dispassionate decisions. Have a plan for when things go right, and when things go wrong. Know your time horizons and your risk tolerance threshold.

4. Placing a trade

After doing your research and choosing a strategy for your investment option, the next step is to execute the trade. 

At this stage, be sure to look for a broker that has the trading capabilities that you need, they use the best execution and offer a trading platform that you are happy using. 

When making a trade, consider the type of order that you want to use, and use the bid-ask report, commissions, and fund fees to manage the overall trading costs. Be aware of the various trading characteristics that come with each of the investment options you go for.

Fidelity’s ETF services recommend the following 3 best practices; noting the bid-ask spreads, using limit orders, and avoiding trading near the market opens and closes.

5. Monitor your positions and adjust them as needed

Fidelity recommends that you check your portfolio mix at least once a year, or in times when your financial circumstances change significantly. For short-term trades, monitor your positions more closely, with regards to your time horizons. There is a wide range of monitoring options online and through mobile apps and alerts. Monitoring your investments should be part of your plan.

Here are some things to consider when monitoring your positions:

  • Risk and return- Plan for each trade before you make it. The plan should include your required return for holding the investment. Ensure that you know what you own by researching thoroughly. Also, ensure that you monitor how well an investment is aligned with your objectives. Set alerts on factors such as news or analyst rating changes that could affect your investment. 
  • Portfolio impact- it’s also important for you to assess how a single trade can affect your overall objectives. If you have a desired asset allocation, ensure that you understand how any trading decision will affect your whole portfolio. Make use of online monitoring of your portfolio to help in evaluating your investments.
  • Tax situation- With time, the value of your investments change and so do the tax implications. One of the most important tax consequences that investors should know about is the short-term capital gains, that attract higher tax compared to long-term capital gains. There are also strategies to harvest tax, which involves managing your portfolio by offsetting your gains with losses.

Is Buying Fidelity Bonds Right For You?

Fidelity bonds are a great strategy to help you in balancing your portfolio and reducing risks through acquiring equities in your asset mix. Fixed-income assets help in ensuring that your portfolio generates income, and also lowers volatility. Mutual funds also come in handy to enhance portfolio diversification and lower the investor’s risks.

The only downside to buying Fidelity bonds are the risks related to interest, credit, and principal. Bond prices decline when interest rates rise and a drop in interest rates results in an increase in the bond price. In addition, bonds are rated by a third party agency which determines the creditworthiness of an issuer. The credit risk for funds that invest in below-investment-grade quality bonds tends to be higher.

Conclusion

Fidelity bonds are an efficient investing strategy compared to other strategies such as buying individual securities. Bonds funds invest in many types of securities and they allow for the buying and selling, depending on the conditions of the market. 

Fidelity bonds can help you in diversifying your portfolio as you can own individual bonds with varying maturities. Fidelity bonds are also managed professionally by analysts who have the experience and technology needed to research and make profitable investment decisions. Their liquidity allows you to trade the shares each day, and you have the convenience of reinvesting your dividends or make an addition to your investments any time.

The Investoralist is here to help you make the right investment decisions by providing up-to-date information on investment trends that will help you make smart investment decisions. Visit the site to learn more.

Schwab Total Stock Market ETF: low-cost fund with no investment minimum

schwab total stock market etf

Charles Schwab Corporation is one of the top financial institutions in the US. It has over 45 years of experience in investment services for clients. Its ETF funds are notable for low costs and zero minimum requirements. You could miss more of the benefits if you plan to invest in ETFs and look another way than the fund Schwab total stock market ETF.

Total Stock Market Index Fund(SWTSX)

Charles Schwab Total Market Index Fund(SWTSX) is an exchange-traded fund that tracks the entire US stock market’s total return. It invests according to the Dow Jones US stock market index.

The Dow Jones US Stock Market Index

Also called the US Dow Jones Index, it is a market capitalization-weighted index. The stocks with the largest market value measure up the most proportions of the index. It covers 95% of the US stock market and calculates the total return of the stocks covered with reinvestments of dividends and interests.

Currently, it tracks 3,778 stocks in the US market as of December 31, 2020. They are the most liquid stocks traded on the exchanges. Foreign companies and exchange-traded funds are not inclusive. The index provides a useful indicator of US market trends and company performances. 

Details of Schwab Total Stock Market ETF

  • Type: US stock market ETF
  • Symbol: SWTSX
  • Low Net Expense Ratio: 0.03%
  • Investment Objective: The fund’s goal is to track the entire US stock market’s return, as measured by the Dow Jones US Total Market Index.
  • Highlights: a. A straightforward, low-cost fund with no minimum investment. b. The fund can serve as part of the core of a diversified portfolio. c. Simple access to the entire US market in one fund. d. The index is designed to provide a comprehensive measure of large-cap, mid-cap, and small-cap US equity securities.
  • Assets Under Management: US13.7billion as of December 31, 2020.
  • Return for Dec 31, 2020: 20.71%
  • One-year Turnover rate: 3.79% It is the cost of change of portfolio holdings in a year. The higher the percentage, the higher fees the fund incurs! 
  • Minimum Initial Investment: None

Schwab Total Market Index Fund

1. Low-cost fund without minimum 

Whether you are newbies or experienced investors, the fund is a fit for all as there is no minimum investment requirement and the expense ratio is only 0.03% low.

2. Diversification

If you plan to hedge your portfolios against risks, the fund is a protection against other risky assets in your investment planning.

3. Simple access to the US market

It is one click to the whole US market and almost all sectors and large-cap, mid-cap, and small-cap companies.

4. Sectors invested

The fund covers major industries all across the US. As of December 31,2020, among them are information technology(27.10%), healthcare(13.90%), customary discretionary(12.40%), financials(10.90%), commercial services(9.90%), industrials(9.20%). They consist of more than 40% of the total portfolio of the fund.

5. Enterprises invested

It invests mainly in primary blue-chip enterprises. The major companies include Apple Inc., Microsoft Corporation, Amazon.com.inc., Facebook class A, Tesla Inc., Alphabet Inc. class A & C, Berkshire Hathaway class B, Johnson & Johnson, JP Morgan Chase & Co. They take up more than 20 percent of the total portfolio.

6. Firearm holdings

A point you should note is Charles Schwab has a transparent policy regarding investing policy. It will disclose some securities that may cause harm to society. The Schwab Total Stock Market ETF reveals only a 0.03% stake of the fund in firearms companies as of March 31, 2020. It offers conscious investors their open and transparent approach to investing.

About Charles Schwab Corporation

The Charles Schwab Corporation is a member of Standard & Poor’s 500 Index with more than US100 billion market value. Its business scope covers investing, banking, and consulting services. Charles Schwab has assets under management for over US500 billion as of June 30, 2020, since it first set up the mutual fund and ETF business. 

Objective: Charles Schwab helps investors better manage their mutual funds and reduce the costs of buying mutual funds by setting up the Schwab Mutual Fund OneSource@ and making investing easier and low-cost. Furthermore, Charles Schwab makes Exchange-Traded funds(ETF) accessible to all by investing in all market ETFs commission-free. That makes investors save more in return to earn more. Schwab total stock market fund series, including ETFs, nowadays have become popular among investors.

Management style: ETFs are passively managed funds based against a stock market index like Standard & Poor’s 500(S & P 500) or Dow Jones Industrial Average(DJIA). It saves investors time to pick stocks and manage their portfolios by mimicking the stocks of market indexes. Charles Schwab goes a further step; it offers Schwab Intelligent Portfoliotm service, an online investment advisory service assisting the management of their portfolios. The fascinating thing is it is free for its clients.

Commission: Of course, we know the trend is for zero-commission; Charles Schwab also offers commission-free for stocks, ETFs, and options trades. Moreover, it uses an order strategy called the Schwab Order Execution Advantagetm to improve clients’ order quality. Through their unique system, clients get better price quotes and faster execution speed.

Robo-advising service: The company offers Schwab Intelligent Portfoliostm, to help manage clients’ portfolios by building, monitoring, and rebalancing assets automatically. The fantastic thing is it is free from advisory fees, account service fees, and commission. You should discuss this with your consultant. 

Useful investment tool: What makes Charles Schwab outstanding is its research. Besides their professional research on equities, bonds, and funds, they have rate stocks and mutual funds based on their rating system. Charles Schwab offers a useful investment tool called “Screen List” reviewed by experts and released quarterly. The tool lets you pre-screen the ETFs and mutual funds well picked by professionals according to categories like big-cap, mid-cap companies.

Apart from that, you can get quotes and fund prices and market updates, and even create watch lists from Google Assistant and Amazon’s Alexa!

To Sum Up

The Schwab Total Stock Market ETF offers many benefits to all walks of investors with its low-cost expenses, no minimum investment requirements. You can access a wide span of industrial sectors and invest in major corporations in the US economy with this fund. It plays a safe bet against risks within your portfolio. Investors are accessible to Charles’s transparent approach to investing.

Finally, you should cross-examine more analysis and information before making a judgment. Besides talking to your financial advisor, you should seek more knowledge from sources like investoralist. An online magazine provides valuable investing information you should not miss; subscribe now to receive updates! 

Bond-rating Scale: What Is It, and How Does It Work?

Bond Rating Scale

Bond-rating helps investors assess a bond issuer’s financial strength to repay the debt on time. Bond-rating agencies set up rating scales to evaluate bond issuers’ creditworthiness. Understanding the credit ratings is essential to bond investors, whether institutional or individual investors, help in investment decisions.

This article will discuss what bond rating is; how bonds are rated; then, we will elaborate on the current leading 3 rating agencies and their rating systems. Finally, we also mention the implications of different bond ratings, outstanding bond ratings, and BBB ratings.

Essentials of Bond Ratings

What is a bond rating?

A bond rating is to evaluate a commercial corporation’s or a government agency’s creditworthiness. Contrary to an individual’s credit score, the rating agencies publish the institutions’ rating scores. Investors make investment decisions based on the financial strength and their probability of repaying the debt.

  • A bond rating process involves three major parties. 1.A bond issuer plans to raise the money. 2. A rating agency assesses the bond issuer’s default risk and cash flow risk. 3. Bond investors buy the bonds and loan the money.
  • There are two types of bond issuers: 1. Government agencies, e.g., local governments, central banks and treasury departments, etc. 2. Private Institutions, e.g., public-listed companies. They need additional capital for operating and cash flow needs. Enterprises need financing or refinancing for their projects.
  • Rating agencies: Three primary agencies occupy more than 95 percent of the credit rating market. They are Standard & Poor’s, Moody’s, and Fitch. They are all paid agencies to assess bond issuer’s credit quality.
  • Bond investors consist of 1. Institutional ones: they are bond funds, insurance companies, banks, sovereign wealth funds and corporations, and retirement funds, etc. They invest in bonds to maintain a regular and steady income for fund owners. 2.) Individual bond investors: they invest in bonds for personal wealth and income accumulation.

What factors affect bond ratings

Internal factors

  1. Creditworthiness: Like a credit bureau, a credit agency evaluates a corporation’s ability to pay back the debt. If an institution is not likely to pay back principals and interests on time, it may have a higher default risk like Finnie Mae and Freddie Mae during the financial crisis in 2008. A corporation may have difficulty in cash flow payments due to deteriorating business situations.
  2. Capital structure: A bond issuer may have complicated capital systems, and it can cause a company to repay even if it has healthy business growth. So a company can set up orders and priorities to pay back creditor’s loans. As a result, investors of lower priorities may have a higher default risk of principal or interest payments or both!
  3. A bond issuer’s competitiveness: If a corporation has edges in business competitions and the capability to increase profit among competitors, it can make bondholders more assured of its ability to pay back principal and interest.
  4. Financial health: A company’s financial position reflects its financial strength and commitment. Of these is a company’s balance sheets, which provide more financial information for investors.

External factors

  1. Microeconomic: Changes in industry and government regulations may have an impact on a company’s competitiveness. For example, more and more consumers are using more online shopping. As a consequence, online companies find bond issues easier than mall operating companies.
  2. Unpredictable events in the future: Unexpected events like earthquakes, pandemics, and floods cause unforeseen damages in principal and interest payments. It is beyond a corporation’s financial commitments.
  3. Third-party risks: Rating agencies consider third-party’s ability to guarantee bond issuer payments. The financially stronger the guarantor, the more secure the commitments become. 

How are bonds rated?

A bond rating is a grade assigned to a bond. The rating defines the borrowing corporation’s financial strength and willingness to repay the debt.

Generally, most bonds are rated by the three rating agencies: Standard & Poor’s, Moody’s & Fitch. They all have their rating systems in place. However, they have clear definitions for grading bonds. 

In terms of investment grades, bonds are all classified into three types:

  1. Investment-grade;
  2. Non-investment grade;
  3. Not-rated. 

According to the US Securities and Exchange Commission, investment-grade bonds have a lower risk of default and a higher likelihood of paying on time, so they have a higher rating. However, non-investment grade bonds, also called high-yield or speculative bonds, are the reverse, so they pay a higher interest. Not-rated bonds are bonds not rated by agencies; they are more likely to default than speculative bonds.

Besides, bond ratings range from the highest quality to the default class. The latter pays the highest rate of interest, with the former the least.

The three rating agencies

1. S&P Global Bond Ratings: it is one of three rating agencies recognized by the Securities and Commission and the oldest. It rates numerous government and corporate bonds and structured finance entities and securities. One of its main jobs is to assess a bond’s default risk. The following table lists the features of their grading system:

GradeDescriptionRating
InvestmentExtremely strong capacity to meet financial obligations.AAA
InvestmentVery strong capacity to meet financial obligations.AA
InvestmentStrong capacity to meet financial obligations, but somewhat susceptible to adverse economic conditions and changes in circumstances.A
InvestmentAdequate capacity to meet financial commitments, but more subject to adverse economic conditions.BBB
SpeculativeLess vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.BB
SpeculativeMore vulnerable to adverse business, financial, and economic conditions but currently has the capacity to meet financial commitments.B
SpeculativeCurrently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.CCC
SpeculativeHighly vulnerable; default has not yet occurred but is expected to be a virtual certainty.CC
SpeculativeCurrently highly vulnerable to non-payment, and ultimate recovery is expected to be lower than that of higher-rated obligations.C
SpeculativePayment on a financial commitment or breach of an imputed promise; also used when a bankruptcy petition has been filed, or similar action is taken.D
N/AThe security was not rated.

2. Moody’s Investors Service Bond Ratings: It deals with evaluating projected loss in case of default. The rating services cover financial, non-financial institutions; sovereignty; structured financial transactions, infrastructure, and project financing.

GradeDescriptionRating
InvestmentObligations of the highest quality, with minimal risk.Aaa
InvestmentObligations of high quality, with very low credit risk.Aa(1,2,3)
InvestmentObligations of upper-medium-grade, with low credit risk.A(1,2,3)
InvestmentObligations of moderate credit risk that may possess speculative characteristics.Baa(1,2,3)
SpeculativeObligations with speculative elements that are subject to substantial credit risk.Ba(1,2,3)
SpeculativeObligations are considered speculative that are subject to high credit risk.B(1,2,3)
SpeculativeObligations of poor standing and are subject to very high credit risk.Caa(1,2,3)
SpeculativeHighly speculative obligations that are likely in, or very near, default, with some prospect of recovery in principal and interest.Ca
SpeculativeLowest-rate class of obligations that are typically in default, with little prospect of recovery of principal and interest.C
#the numbers in the bracket indicate the obligations to pay from 1-strongest, 2-stronger, 3-strong.

3. Fitch Ratings: It is the smallest of the three. Like S&P’s, it rates the probability of default. It also covers sovereigns, financial institutions, corporate finance, Islamic finance, structure finance, and global infrastructure.

GradeDescriptionRating
InvestmentExtremely strong capacity to meet financial obligations.AAA
InvestmentVery strong capacity to meet financial obligations.AA
InvestmentStrong capacity to meet financial obligations, but somewhat susceptible to adverse economic conditions and changes in circumstances.A
InvestmentAdequate capacity to meet financial commitments, but more subject to adverse economic conditions.BBB
SpeculativeLess vulnerable in the near-term but faces significant ongoing uncertainties to adverse business, financial and economic conditions.BB
SpeculativeMore vulnerable to adverse business, financial, and economic conditions but currently has the capacity to meet financial commitments.B
SpeculativeCurrently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.CCC
SpeculativeHighly vulnerable; default has not yet occurred but is expected to be a virtual certainty.CC
SpeculativeCurrently highly vulnerable to non-payment, and ultimate recovery is expected to be lower than that of higher-rated obligations.C
SpeculativePayment on a financial commitment or breach of an imputed promise; also used when a bankruptcy petition has been filed, or similar action is taken.D
SpeculativeThe security was not rated.NR

Investment-grade vs. Junk Bonds

Bond-rating agencies assess bonds per bond quality and stability. Besides, the rating process involves expectations and outlook. These factors undoubtedly influence an investor’s attitude towards bond investment. 

Investment-grade bonds are rated quality-grade as they provide stable cash flows and are viewed as safe investments. However, the rates of interest are relatively low. They range from “AAA” with the most robust financial strength to “BBB” grading with the least.

Bond not belonging to the bonds as mentioned above are non-investment grades or “not-rated.” They are high-yield or junk bonds with attractive rates of interest. Investors interested in these bond investments should beware of bond issuers’ financial aspects and business circumstance changes.

Generally, junk bonds are divided into two major categories:

  • Fallen Angels: The bond issuer’s rating has lowered from “investment” grade to “non-investment or junk” status.
  • Rising Stars: The status of “non-investment” is promoted to “investment” or higher “non-investment” grades.

Conclusion

If you intend to invest in bonds, you should use a bond rating scale provided by a rating agency to assess your potential bond issuer and bond’s quality. More than that, you should look beyond the rate of interest as a bond’s viability is determined by multiple factors. 

An investor should note the implications of “investment” and “speculative” or not-rated graded bonds. The three rating agencies provide reliable information needed to assist investors in doing the jobs. 

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