There are many choices when it comes to investing money. The only way you can have an idea of which investment option will best work for you is by evaluating the investment strategy of that option and looking at associated risks. It is important to do it in order to find the best opportunity for you which means you can stay in the game for long, benefiting from it financially.
Mutual funds are one of the most common investment types that many investors prefer to use for doubling their money. They are considered as open-end and describe funds’ method of selling and purchasing shares. Mutual funds give individuals the facility to join and leave at any given time, allowing excellent flexibility in investing terms. You can purchase your fund shares from mutual funds broker or company and sell them at the appropriate time to get profit.
Interestingly, mutual funds have too many investment options for investors; and some of main choices are money market funds, bond funds, global equity growth funds, and balanced funds. All of these sub-categories are defined as per their diverse characteristics.
What are Bond Funds?
Among many sub-categories of mutual funds, bond funds are basically investment in bonds and other relevant securities. Contrasting other investment types, they give out their dividends and interest intermittently, more often than other options of mutual funds category. Likewise, they also pay out significantly higher dividends than money market accounts.
Types of Bond Funds
Bond funds too have numerous categories which are mainly characterized by basic securities and assets for investment. There are several types of these funds and each of them has its individual characteristics. These include the following:
1. Government or Treasury Bonds – This bond funds category is considered to have the lowest risk element since they are supported by the treasury. For that reason, chances of losing your primary investment are very unlikely.
2. Mortgage Bonds – Issued by governmental agencies such as Government National Mortgage Association, mortgage bonds too have low risks associated as they are backed by government owned mortgage agencies. You can invest at least two-thirds of their portfolios in mutual mortgage supported securities.
3. Corporate Bonds – As name suggests, corporate bonds are issued by diverse corporates and are backed by the issuing corporation. They have a bit high risk fact which can be explained by the fact that you can lose your primary investment if the corporate goes bankrupt.
4. Municipal Bond Funds – These types of bond funds are offered by local government. They are used according to set classifications, such as, term of maturity which usually refers to whether the investment will be for short, medium or long term basis.
5. Global Bond Funds – These funds invest in global debt securities. More than 25 percent of the securities in their portfolio except for the cash can be invested in those corporations that can be found all across the United States.
6. High Yield Bond Funds – This option is good for those investors who seek to earn a high level of returns on their investments. These funds allow you to invest at least two- thirds of their portfolio in any lower-rate corporate bonds and make money.
Associated Risks of Bond Funds
Also known as fixed income fund, this investment option comes with a higher risk than other mutual funds types. The main reason behind its higher risk is that bond funds try to obtain higher return. Unlike money market funds, these funds are not limited to a certain type of investment. Most of all, it has varying risks, including credit risk as some parties may not be able to pay dues, prepayment risks since the bond issuers may choose to repay debit to release new bonds when the interest rates drop, and interest rates risks as the value of bond funds can drop when the interest rates are high.
Bond funds may turn out to be the best option for those who want to diversify their investments and seek returns that are actually higher than money market accounts. Likewise, investors who value fairly stable returns over growth and can afford uncertain fluctuations in the share price can look into this option.
Best time to Invest in Bond Funds
Bond funds use investment strategies that are intended to produce higher returns. Previously, there was a little need for individuals to be concerned with the best time for investing money in these types of funds since lose in them was normally offset by gains in other investment option. Most of today’s investors are ignorant of associated risks since they haven’t personally experienced a time of increasing interest rates.
The best time to put in your money in bond funds is normally when their interest rates are higher and begin dropping down. Similarly, it is never advisable to buy bond funds when these rates are low and appear to be climbing up. Their portfolio value goes up when rates are low and drops down when rates rise.
Key Benefits of Investing in Bond Funds
Bond funds investments are normally accompanied by three main benefits described below:
1. Management – All bond funds have a manager which generally evaluates the relevant industry and looks at all the potential assets that the fund could purchase or owns. The manager crafts the asset within that particular fund type to yield the best possible return along with the most stability.
2. Diversification – Bond funds hold numerous positions. So, the risk factor of losing your investment is less in the term that if one security or asset by the fund drops down whilst others continue to be stable, you can offset it by others.
3. Easy Investments – Trading of most categories under bond funds are based on every day’s closing rates. This makes it less vulnerable to major daily price fluctuations so you do not need to an intra-day position to invest money.
If you are an investor and looking for some lucrative options for investment, bond funds can be one of the best choices. They can give you the balance to your investment portfolio that you have always desired. Bond funds have ridiculously low interest rates these days that they cannot go much lower. In view of that, the increasing demand and fluctuating interest rates require individuals to keep their eyes open as this area of investment unfolds itself.