Basic Bond Fund Information:
A bond fund is sometimes referred to as an income fund. These bonds are set up on a fixed income therefore explaining the alternate name. Bond funds are commonly used to balance out portfolios. Bonds are similar to loans only they have a security.
Bond funds are thought to be less risky than other types of funds. Yet, there are still risks. Some of the common risks include: Credit risk -or risk that funds may default. Prepayment Risk- If a borrower of the funds chooses to repay the balance on the bond while interest rates are lower than at the initial time they acquired the bond. In this case the return of the bond would be decreased. Then there is the Interest Rate Risk-This risk occurs when the market value of the bonds owned by a fund either go up or down.
The Pros and Cons of Bond Funds:
Bond funds have many pros and cons that should be considered when one is ready to invest. A few important cons to consider:
* These bonds tend to be more expensive than individual bonds or trusts.
* The higher the cost to invest the less return you will yield from the bond.
* These bonds have no fixed date to mature.
* The initial investment of each bond can vary greatly.
Pros to consider include:
* There are a number of items to choose from meaning the market is very diverse.
* These bonds have professional management.
* The bonds are liquid meaning you can sell anytime at current value.
* These bonds are always available.
* Dividends are available to be reinvested.
3 Common Bond Funds:
* Taxable bond funds offer many ranges of choices. The type of fund will depend upon your investment objective. These investment range from U.S. Government to corporate securities . Some are low risk and some are high. Risk and investment depends on what you are wishing to do.
* Tax Free Bonds are federal tax exempt. This type of bond seeks to provide a high amount of return after taxes. These bonds are issued in different states and are municipal.
* Taxable and Tax Free Market Fund offers income while attempting to maintain a constant share price.
If you are considering investing in bonds you should always read all information about the bond you are considering. Information to look for is prospectus, profiles, statement of additional information or ( SAI ), and share holder reports. To obtain this information investors can call or write the investment company. All investment companies come equipped with a toll-free telephone number which can usually be found on the companies website.
Selecting the Right Bond for You:
Once you decide the amount of cash you are willing to invest in bonds the next step is to decide what bond will best benefit you and your portfolio. Below are some things you will want to consider to choose the best bond for you!
* What degree of risk do you wish to assume? This will help you determine if you need a short or long term bond. Shorter terms carry less risk than longer terms. Return will also be less with shorter bonds.
* Do you want a higher return or higher quality bond? If seeking higher investment a Government bond might better suit your needs. Higher yields can be sought in corporate bonds.
* What rate of return are you looking for? The more income you are seeking the longer maturity the bond will need resulting in a higher risk. Less income is better suited to a quicker maturity date.
*Tax brackets may also be considered for the type of bond you need. If you are in a high tax bracket you may wish to seek tax exempt bonds such as municipal bond funds.
A bond fund offers its owner the ability to reduce portfolio risk, a means of emergency cash or even a monthly income. The type of cash needed will determine which bond best suits your needs. Before investing read all information and contact the company with any questions. Once your questions are answered and you have a clear understanding you are ready to invest.