Understanding Bond Funds in general

If you are the type of investor who want to avoid the dramatic fluctuation and risk (or fairly risk averse and conservative) need to stick to safer investment options such as money markets, CDs and BONDS!

Like stocks, bonds can also either give you capital and passive income gains but has lower returns due to the lower risk of a loss of principal.

A bond is similar to a loan. In a loan, an individual borrows money and agrees to pay back the loaned amount with interest on an agreed time frame. Now when people buy bonds, they become investors who lend money to companies. In exchange, the company pays a regular interest called a ‘coupon’ at predetermined intervals. On the date of maturity, the principal is returned and thus ending the transaction.

Types of Bonds

  • Government issued bonds - these are the safest of all bu with the least guaranteed return.
  • Corporate Bonds - These have higher risk level but also higher returns. Large companies have a lot of flexibility as to how much debt they can issue, generally. A short-term bond can have at least 5 years maturity and up to 10 years or more.
  • Convertible Bonds (or CVs) - is a bond that can be pre-terminated and may be redeemed for a predetermined amount of the company’s equity at a certain time during it’s life, at the discretion of the bondholder.
  • Junk Bonds - It is a high-yield bond or even known as a ‘speculative-bond’ which has a high risk of default. It is best to avoid this one unless you are willing to take the risk.
  • Callable Bonds - Redeemable bonds which can be redeemed prior to maturity.

For the first-time, clueless and lazy investor, an option for you to take is the ‘bond-funds’ route that are offered either via a mutual fund company or by banks via UITFs (Unit-Investment-Trust-Funds). Like the pooled equity fund, your money is invested in a pooled fund that is invested in multiple individual-bonds by professional investors.

Bonds or bond fund is a good option for diversification of one’s investment portfolio as well. Because typically, bonds behave differently compared to stocks. Bond price moves in the opposite direction from inflation. Bond prices rise when stocks fall. This is due to market sentiment, so if confidence in the economy falls, investors pull out of stocks seeking for safer investment instruments like bonds.

Quick tips for bond investing:

  • Define your goals/objective - for what are you investing in bonds for? This will give you a clear picture of a timetable for investing in bonds.
  • Always do some research - Understand the bonds being offered to you, and determine what type of bond it is and the timetable. You need to know how long your money will be tied up or how fast can you withdraw from this particular investment and the like associated penalties.
  • Read the prospectus for Bond Funds - Yes, a lot of reading is required. Stop complaining, you don’t want to lose your money right? Check for add-on management fees which could affect your returns too.
  • For individual bonds, get help - Locate a firm and/or broker specializing in bonds. They understand better the associated costs of buying and selling a bond.
  • You can’t time the market - Same with stock investing, avoid speculating on interest rates.

And just like any other investment vehicle, understanding more further (Bond market, it's factors and the like) will help you make a better investment decision as well as the necessary timeline to keep investing in that particular vehicle.

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Understanding Bond Funds in general Understanding Bond Funds in general Reviewed by Vernon Joseph Go on Tuesday, April 02, 2019 Rating: 5

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