According to a spokesperson, the reason for the note was the rise in investor appetite for such funds currently being seen in the market and a desire to ensure that investors know what they are getting when investing in such products.
The FCA explain in the note that, while most corporate bonds funds are characterised by limited capital risk because they are largely unaffected by currency movements and experience low impact from company defaults, they are not risk free. And, it said, before investors enter the market they should consider the downside.
The first risk factor to consider, it said, is liquidity.
“If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds,” it said.
It adds that while bond fund managers are employed to manage such risks and generally ensure that investors are able to buy and sell units freely, it warns that: “in very extreme market conditions fund managers could become unable to sell sufficient quantities of bond holdings to fulfil redemption orders, leaving investors unable to sell fund units”.
Another point to consider, it said is that, while corporate bond funds mainly invest in bonds where the risk of default is low, company defaults can impact the level of returns generated by the funds.
“An unexpected default reduces income and the capital value of a bond holding. Also, market expectations about economic conditions and the likely number of corporate defaults drive bond and fund prices,” it said.
