Investing what are Bond Funds

The number of Americans approaching and entering retirement continues to increase as the older members of the Baby Boomer generation near the end of their careers. With that in mind, more people are looking for ways to continue growing their investment portfolio, while also reducing their level of risk exposure. For many investors, bonds appear very attractive for generating consistent income and long-term total return.

It is entirely possible to purchase individual bonds to achieve these goals, however the cost of creating such a portfolio and the intricacy required would quickly become insurmountable. Bonds are divided into varying categories of quality, duration, and sector. Without intimate knowledge of each of these aspects and how they interact with one another, it would be nearly impossible to successfully create an appropriate bond portfolio. Additionally, most bonds are sold in lots that have minimum purchase prices well above what the average American is able to afford, thereby making it unlikely that an individual investor will have enough capital to purchase the bonds required for an entire portfolio.

Since bonds can be an appropriate component to a portfolio, yet also difficult, if not impossible, for inexperienced individuals to obtain, most mutual fund companies offer bond funds in their lineup. The greatest benefit to investors who purchase bond funds is the professional management of that portfolio. Very simply, investors’ money is pooled together and handled by a team of experienced analysts and money managers who ultimately decide which securities to purchase, when to buy them, and when to sell them.

Mutual fund managers are very often working with hundreds of millions of dollars, giving them the ability to purchase bonds or other securities that an individual would otherwise be unable to get. Additionally, fund managers are able to make these purchases at lower prices than what would be possible for an individual simply because of the sheer size of the transactions from the institution.

Investing in bond funds is an efficient and practical method for an individual to participate in the bond market without the need for significant capital or intricate industry experience and knowledge. The risk to the investor’s principal is significantly reduced in a bond fund when compared to an attempt at purchasing similar securities alone. Mutual fund companies also have access to information and resources that an individual would not, and this fact alone could demonstrate the benefit of utilizing bond funds.

For those investors who decide to purchase bond funds, there are typically two ways to do so. The first is simply to contact the mutual fund company with whom they choose to invest, either via telephone or the internet, open the appropriate account type, deposit or transfer their money, and provide investment instructions. This process would be the same regardless of which fund company the individual selected, and more fund companies are streamlining their processes to make online investing easier and faster.

The second method of investing in a bond fund is to contact a local independent investment advisor or financial planner. This industry professional would accomplish the exact same things, but would also act as the liaison between the fund company and the investor. Since there are various types of industry professionals able to assist clients in this fashion, it becomes important for the investor to understand the differences between them, as well as evaluate the potential costs of enlisting the services of each one.

Although it would be less risky for an investor to purchase shares of a bond fund rather than individual bonds, there are still certain key issues that should be addressed and considered prior to making any final decisions. With the number of mutual fund companies totaling several thousand, and the number of bond funds offered by these companies being an exponent of that, the major challenge is selecting the best company and the best fund. To this end, it is usually advantageous for the investor to seek the assistance of a qualified professional, usually one who is independent and not limited to any one company’s products alone. This professional would then be able to explain how the mutual fund companies differ, how the particular bond funds differ, the fees inside of each fund, and the specific risks as compared to other investment vehicles.

Selecting the best financial advisor presents yet another challenge for the investor, and can also make a significant difference in the quality of the advice and assistance received. Since advisors vary in too many ways to address within the scope of this writing, it is important to note that those individuals considering an advisor should perform their own due diligence with respect to verifying the credentials and background of the person or company with whom they plan to conduct business.