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Bond Mutual Fund Explanation

Bonds represent financial instruments that allow entities to borrow money from the public. This kind of loan is in the form of securities, which are mainly issued by the local or state governments, or big corporations. They represent the borrowers to whom you lend your money. Bonds represent a promise by the borrower to return the taken money by adding certain predetermine interest.

Generally, bonds are considered more secure than stocks, even though they do carry their specific risks, the most notable of which is inflation.

Bond funds also known as income funds represent mutual funds that concentrate on the investing in bonds (as their name implies) and other types of debt securities. If you want to insure a regular income, especially when you are close to your retirement, investing in bond funds is the suitable action you can undertake. They are a good tool for managing the risk in your investment portfolio because the explicit and implicit laws that govern the bond market are different from those that influence the stock market. Therefore, by maneuvering between the two you can successfully balance your risk and increase the possibility for higher returns.

Bond Mutual Fund Advantages

Bond funds are a preferred method of investment because they provide diversification and are extremely convenient for use since they are governed by a professional fund manager. On the other hand, investing simply in bonds can complicate the situation since you have to be on the constant watch, which is eliminated by the bond fund manager. By the accumulation of financial resource typical for mutual funds, you get access to better deals, which otherwise as an independent investor, you may miss. Another advantage that bond funds provide is the possibility of automatic reinvestment of the acquired gains. Furthermore, issuing checks right from your fund account is a service that an increasing number of bond funds have started to offer.

Bond Mutual Fund Types

Bond funds can be categorized as:

  • Mortgage-Backed Securities Funds - residential mortgage securities
  • Municipal Bond Funds - non-taxable funds; the bonds are issued by the state and local governments.
  • U.S. Government Bond Funds - U.S. treasury or government securities used.
  • Corporate Bond Funds - US corporations' debt obligations used.

According to the maturity date, bond funds can be:

Type Years left to maturity of the holdings Example
Short-term bond fund up to 2 years bills, CDs, commercial paper
Intermediate-term bond funds from 2 to 10 years notes
Long-term bond funds over 10 years -

Bond Applications

  • Portfolio security increase - bonds are a suitable way to reduce the risk in your investment portfolio and balance your stock holdings.
  • Monthly income - bond funds provide a great opportunity for creating a monthly income especially for the risk-averse investors or for people nearing their retirement age.
  • Money for urgent situations - the check writing privileges that some bond funds offer, provide you with the possibility of always being able to use your resources, especially when in urgent need.
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