What are the BOND FUNDS?
A bond fund is a fund that invests in bonds and some other debt securities. It is a mutual fund that is an efficient way of investing in bonds. An investor needs to choose the type of bond to invest based on his tax bracket and the bond fund manager relies on the type of bond that an investor chooses to invest.
Bond funds do not possess a maturity date for the principal repayment, and thus the invested amount may fluctuate from time to time. Investors participate participates indirectly in the interest that is paid by the underlying bond securities that are to be held in the mutual fund. The distribution of interest income varies every month that contains all different bonds included.
Read Also: How much is the minimum investment required to invest in bonds?
There are different types of bonds that are classified on the tax bracket and the weight of the investment that can be invested by the investor.
- Treasury Bonds
- Government Bonds
- Investment Grade corporate bonds
- Foreign Bonds
- Mortgage-Backed bonds
- High Yield Corporate Bonds
- Municipal Bonds
The bond fund manager can invest in any type of bonds depending on the type and the tax bracket of the investor at current market criteria
Why Are Bond Funds the Most Attractive Option?
In spite of being the safest form of investments, there are many benefits that attract every investor to go toward the bond funds.
- Bond funds are easier to participate in any investment than purchasing the individual bond instruments to make up to the bond portfolio.
- You (Investor) need to pay only the annual expense ratio that contains administration, marketing, and professional management fees unlike purchasing dealing with the transaction cost associated with each and every expense associated with the deal.
- It provides instant diversification for minimum investments since a bond fund usually has a collection of varying maturity period.
- It provides access to the professional portfolio manager and that the reason principal is preserved from the core with providing interests in the specific duration of time.
- You can sell the bond funds at any time for their NAV( net asset value) at present market criteria.
- Minimum probability of loss as the whole rate of investment is preserved providing the fixed interest rate that has the sole use of increasing the income of investors and the Bond fund manager.
Bond Funds and Profit
Most bond funds consist of Corporate or government type of bonds that are classified based on the maturity period. The maturity periods such as short-term, Intermediate-term and Long-term are proportional to the type of bond funds.
Not all the funds but some of them are considered as the safe bonds such as government bonds. US Government Bonds are the safest and are of high credit quality not subjected to the rating. Bond funds that are invested in TIPs (Treasury Inflation Protected Securities) are the safest one but it tends to offer the lowest potential return.
Except for the Government Bonds, every other bond funds invest only in high yield bonds. Bond funds that invest in the volatile type of bonds, tend to possess the highest potential returns.
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