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Bond Fund Risk

Comparing the risks associated with different types of bond funds can help you choose the right fit for your portfolio.

Questions?

To help you better understand the risks associated with different types of bond funds, Fidelity uses Morningstar's category risk ratings. Morningstar assigns a risk score to each of its mutual fund categories. This graph is meant to show the risks of bond funds within different categories relative to one another. Note that it does not represent the risk of a specific fund within its Morningstar category or show the entire risk spectrum.

Learn more about Morningstar's methodology for evaluating category risk.

Morningstar's Methodology for Evaluating Category Risk

Morningstar assigns a Category Risk Level to each group of mutual funds that invest in the same types of assets. These scores range from 1 (for funds with the least amount of relative risk) to 10 (for funds with the greatest amount).

In determining the Category Risk Level, the scores based on the Morningstar Risk are reviewed by Morningstar’s Research Committee. The Committee reviews the preliminary output, and makes changes where necessary, to ensure that the final scores are logically consistent and are updated to reflect current market conditions.

How Morningstar calculates category risk scores

The first step is to determine the average Morningstar Risk for each category over the previous five years. Morningstar Risk is the difference between the Morningstar Return (excess total return over the risk free rate, adjusted for loads) and the Morningstar Risk Adjusted Return (excess total return over the risk free rate, adjusted for loads and risk). Risk is measured by the variations in a fund’s monthly total returns during the period, with greater risk leading to a lower risk-adjusted return. The Morningstar Return and Morningstar Risk Adjusted Returns for each category are found using an equal weighted average of the total returns of all the funds in the category for a certain time period.

The category’s Morningstar Risk is then used as the starting point for the Category Risk Level assignments. Assignments can be modified in one of two ways. One method of modification is by logic. For instance, if one municipal bond category falls just across the dividing line from another municipal bond category (even though both invest in very similar types of assets), both categories are adjusted so that they are given the same risk assignment. They may also be adjusted by judgment. One example of this would be Long-Short Market Neutral stock funds. Although these funds tend to show very low risk scores based solely on the variations in their returns, the complexity of their strategies suggests that they should receive a higher risk score than the raw data indicates. In this case, the Category Risk score is adjusted accordingly.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information.  Read it carefully.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.)  Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest income generated by municipal bonds is generally expected to be exempt from federal income taxes and, if the bonds are held by an investor resident in the state of issuance, state and local income taxes. Such interest income may be subject to federal and/or state alternative minimum taxes. Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets. Generally, tax-exempt municipal securities are not appropriate holdings for tax advantaged accounts such as IRAs and 401(k)s.

Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
©2012 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses.
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