In today's financial landscape, the effective management of personal finances has become a pressing concern for many investorsWith a growing interest in making informed investment decisions, individuals like Zhao Peng, a resident of Beijing, have begun exploring various financial products offered by banksRecently, Zhao expressed curiosity regarding fixed income investment products after discovering that their returns did not surpass those of bond funds from the previous yearThis dilemma begs the question: why do fixed income products yield less than anticipated, especially when they primarily invest in bonds?

Data from Puyi Standard indicates that by December 30, 2024, the average annualized return for bank wealth management products stands at around 3.34%. Of that, cash management products yield roughly 1.88%, fixed income products offer about 3.47%, mixed-asset products yield approximately 3.39%, and equity products deliver an average return of about 6.61%. Conversely, Wind's data reports that bond funds have an average annualized return of 4.59% for 2024, with an impressive 1,315 bond funds exceeding a 5% yield, and even 55 funds breaking the 10% barrier.

The financial market in 2024 displayed a unique phenomenon where the bond market experienced volatility while still trending upwards, thus positively affecting both fixed income products and bond funds

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However, a closer analysis reveals that fixed income products generally underperformed compared to bond fundsResearcher Zhang Qiaochu from Puyi Standard explains that this discrepancy largely stems from the differing proportions of bond investments in each financial vehicleTypically, bond funds allocate a higher percentage of their portfolio directly to bonds compared to fixed income productsAs a result, their performance is more significantly influenced by bullish bond market conditions.

Interestingly, fixed income products often rely on a more diversified portfolio, which includes a higher proportion of cash and deposit-like assetsIn an environment characterized by declining interest rates, those cash market assets generally perform poorlyAdditionally, ongoing pressure on net interest margins has led to lowered rates on deposit assets, which further diminishes the overall returns of fixed income products

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Conversely, bond funds tend to have lower exposure to cash market investments, making them less susceptible to the turmoil affecting those assets.

A banking industry expert elaborated on this notion, noting that pure fixed income products usually distribute investments across various asset types, including deposits, non-standard loans, interest-bearing bonds, and credit bonds, striving for balanced allocationIn contrast, the underlying assets of pure bond funds are predominantly composed of interest-bearing and credit bonds, with certain funds augmenting returns through convertible bonds and equity investmentsAccording to Wind’s statistics, an impressive 96.04% of the assets in bond funds are allocated to bonds, while only 1.24% and 0.91% are in cash and stocks, respectivelyThe bullish conditions in the bond market have consequently resulted in higher average yields for bond funds.

Another critical factor influencing the disparity in returns is the duration of bond investments between the two options

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Generally, bond funds tend to hold bonds with longer durationsWhen interest rates decline rapidly, these funds can capitalize on higher yieldsResearch indicates that throughout 2024, the median duration for interest-bearing bond funds varied between 2.5 to 4 years, peaking at 4.3 years by the end of the yearOn the other hand, credit bond funds exhibited median durations ranging from 1.5 to 2 years, extending to 2.1 years as the year closedMeanwhile, bank wealth management investments in bonds typically boast shorter weighted average durations, often falling between 1 to 2 years.

In her analysis, Zhang highlights that due to the longer duration of bonds held by bond funds, they naturally outperform fixed income products during bullish periods for bondsThe increasing ratio of long-duration assets in bond funds leads to significant increases in their yields as market conditions improve.

However, caution must be exercised due to the rapid decline in long-term government bond yields, which has attracted a broad spectrum of attention

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A press conference on "The Achievements of High-Quality Development of China's Economy" recently addressed the stability of government bonds, asserting they represent state credit with a guaranteed return of principal and agreed-upon interest if held to maturityNevertheless, the fixed nature of long-term government bond rates means variations in market interest rates can lead to substantial price fluctuations in secondary market transactions, underscoring inherent risks in government bond investments.

Investors need to adopt a balanced perspective when assessing the yield differences between fixed income products and bond fundsZhang emphasizes the diversity inherent in fixed income products, which often hold a significant proportion of low-risk assets like deposits that bolster stability during turbulent market conditionsWhile bond funds are heavily invested in bonds and thus more closely correlated with bond market fluctuations, they may achieve higher returns in a bullish market yet face sharp declines during market corrections