Why Bond Mutual Funds Are So Popular
Mutual funds are investments that bring money together into a common pool for it to bear a return which is then shared among the investors. Bond mutual funds refer to debt securities that one invests in with the aim of protecting the initial principal paid while getting a regular income from the investment. There is a dollar value of one share in the investment, which is basically the trading value of the investment.
Bond mutual funds are popular with many investors for two main reasons, i.e. income earning and opportunity for diversification. If you check well around the stock market, you will realize that this type of investment fetches much higher returns in form of dividends than most others. They are also considered to be low risk investments, but not entirely risk-free. The risk is low due to the fact that the investment monies are spread out among many bonds. Some bonds are also tax-exempted.
In the United States, there are three basic types of bond mutual funds. These are U.S. Government bonds, municipal bonds and corporate bonds. Just like all other types of investments, they attract different rates of return and the amount of risk involved also differs. The U.S. bond investments are issued by the government or its agencies. The biggest advantage with them is that they are considered the safest since they are backed by the credit of the government. The only risk involved is the fluctuation of interest rates and inflation.
Municipal bonds are also invested in debt securities and are issued by the state and local governments to pay for the local public utilities and facilities. These are projects like schools, highways and bridges. Their advantage is that they are tax-exempt and are also backed by the government. The risky bit is that, municipalities tend to go bankrupt way too often, leaving these investments in a risky state. Corporate bonds are issued by corporations.
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