Due to instabilities in the current market, more people are looking to invest in bonds rather than stocks. Bonds are issued by Corporations and Government agencies when they borrow money, and investors can purchase these bonds. There are two types of bond on offer; Individual and Bond Mutual Funds.
Bond mutual funds invest in bonds and other debt securities, and often specialize in a particular bond type, such as corporate bonds, municipal bonds or some other type of government bond. Bonds are seen as a safer bet than stocks and shares (this is why it is often referred to as a conservative investment). Such investments protect the original invested amount whilst paying out a regular income.
If you invest in a bond mutual fund, you will receive dividends each month. These will incorporate any interest payments from the fund securities and also any profit from increases in the market price of the bonds. All types of mutual funds have a net asset value (NAV), and this is commensurate with the dollar value of one share in the fund. Investors pay this price when buying or selling shares in the fund.
Investors profit from bonds in two ways:
The income: Bonds tend to pay higher dividends than other forms of investment such as savings accounts, and dividends are paid out more frequently than individual bonds.
The low-risk element: This is due to diversification, which is the strategy designed to reduce risk by combining many different investments within a portfolio. The diversification of investments ensures that assets do not move up or down in value at the same time or at the same rate, and this makes for a more consistent performance, regardless of economic conditions. Note that investing in bond funds is not entirely risk free - see below.
There are three basic types of bond funds:
US Government Bond Funds invest in bonds issued by the US government and any associated agencies. These are the lowest risk bond fund, as the securities are backed by the full faith of the government. Some US government bonds are exempt from state and local taxes. Risks: related to inflation and fluctuating interest rates
Municipal Bond Funds invest in bonds issued by local and state government. These are popular amongst rich investors because they are exempt from federal taxes, and state taxes also in some instances. These bonds are also backed by the government. Risks: municipalities have declared themselves bankrupt, making this type of bond fund more risky than the US government bond fund.
Corporate Bond Funds invest in bonds issued by corporations. These are not backed by government, and so the element of risk associated with this fund is much higher. However, the other side of this is that the rewards are much greater: incomes paid by corporate bond funds tend to be much greater that those paid by government-backed funds. If you are looking to invest in corporate bond funds, consider the investment-grade option. These only invest in the most secure companies and thus are considered the safest of all corporate bond funds.
For more information on mutual funds bonds and general investing resources check out http://www.mutualfundsbonds.com