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Is PDINX a Strong Bond Fund Right Now?

Zacks Equity Research

If investors are looking at the Diversified Bonds fund category, Putnam Diversified Income A (PDINX) could be a potential option. PDINX carries a Zacks Mutual Fund Rank of 1 (Strong Buy), which is based on nine forecasting factors like size, cost, and past performance.

Objective

PDINX is one of many Diversified Bonds funds to choose from. Diversified Bonds funds give investors exposure to a variety of fixed income types that span across different issuers, maturities, and credit levels. Usually, these funds will have a good amount of exposure to government debt, in addition to modest holdings in the corporate bond market.

History of Fund/Manager

Putnam Funds is based in Canton, MA, and is the manager of PDINX. The Putnam Diversified Income A made its debut in October of 1988 and PDINX has managed to accumulate roughly $1.11 billion in assets, as of the most recently available information. The fund's current manager is a team of investment professionals.

Performance

Obviously, what investors are looking for in these funds is strong performance relative to their peers. This fund in particular has delivered a 5-year annualized total return of 2.66%, and is in the middle third among its category peers. Investors who prefer analyzing shorter time frames should look at its 3-year annualized total return of 5.87%, which places it in the top third during this time-frame.

When looking at a fund's performance, it is also important to note the standard deviation of the returns. The lower the standard deviation, the less volatility the fund experiences. The standard deviation of PDINX over the past three years is 3.4% compared to the category average of -33.98%. Over the past 5 years, the standard deviation of the fund is 4.98% compared to the category average of -8.62%. This makes the fund more volatile than its peers over the past half-decade.

Bond Duration

Modified duration is a measure of a specific bond's interest rate sensitivity, and is an excellent way to judge how fixed income securities will respond to a shifting rate environment.

For investors who think interest rates will rise, this is an important factor to consider. PDINX has a modified duration of 1.73, which suggests that the fund will decline 1.73% for every hundred-basis-point increase in interest rates.

Income

We must remember to consider the fund's average coupon, as income is traditionally a big reason for purchasing a fixed income security. This metric takes a look at the average payout by the fund in a given year. For example, this fund's average coupon of 4.74% means that a $10,000 investment should result in a yearly payout of $474.

For those seeking a strong level of current income, a higher coupon is typically good news. However, it could pose a reinvestment risk if rates are lower in the future when compared to the initial purchase date of the bond.

Income is only one part of the bond picture, investors also need to consider risk relative to broad benchmarks. This fund has a beta of -0.23, meaning that it is less volatile than a broad market index of fixed income securities. Taking this into account, PDINX has a positive alpha of 3.19, which measures performance on a risk-adjusted basis.

Ratings

Investors should also consider a bond's rating, which is a grade ( 'AAA' to 'D' ) given to a bond that indicates its credit quality. With this letter scale in mind, PDINX has 42.54% in high quality bonds rated at least 'AA' or higher, while its junk bond component-bonds rated 'BB' or below-is at 41.06%. This means that the fund has an average quality of A, and focuses on high quality securities.

Expenses

For investors, taking a closer look at cost-related metrics is key, since costs are increasingly important for mutual fund investing. Competition is heating up in this space, and a lower cost product will likely outperform its otherwise identical counterpart, all things being equal. In terms of fees, PDINX is a load fund. It has an expense ratio of 0.49% compared to the category average of 3.91%. PDINX is actually cheaper than its peers when you consider factors like cost.

Investors should also note that the minimum initial investment for the product is $500 and that each subsequent investment has no minimum amount.

Bottom Line

Overall, Putnam Diversified Income A ( PDINX ) has a high Zacks Mutual Fund rank, and in conjunction with its comparatively similar performance, worse downside risk, and lower fees, this fund looks like a great potential choice for investors right now.

For additional information on the Diversified Bonds area of the mutual fund world, make sure to check out www.zacks.com/funds/mutual-funds. There, you can see more about the ranking process, and dive even deeper into PDINX too for additional information. Want to learn even more? We have a full suite of tools on stocks that you can use to find the best choices for your portfolio too, no matter what kind of investor you are.


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