Why Bond Funds Pay Significantly Higher Dividends
Mutual funds come with in sub-categories, all of which are defined according to their unique characteristics. Among the many sub-categories are the bond funds which are investment in bonds and other related securities. Unlike other types of investments, they normally pay out their dividends and interest periodically, more often than the rest of the investments under the mutual funds category.
One major thing to note about them is that they pay significantly higher dividends than most other types of investments like CDs and money market accounts. The bond funds come in many categories, which are characterized by the primary securities and assets that they invest in. There are four major categories and they differ from each other in one way or another.
One of the categories is the Government or the treasury bonds which are considered to have the lowest risk factor. This is for the simple reason that they are backed by the treasury and therefore loss of ones investment is very unlikely. Mortgage bonds are issued by government agencies like Government National Mortgage Association. They also have relatively low risk because they are guaranteed by the mortgage agencies, which in this case are government owned.
The third category is one of corporate bonds, which as the name suggests is offered by corporations. They are guaranteed by the issuing company and the risk factor is a bit high. This is explained by the fact that an investor stands to lose his money if the corporation goes bankrupt. The last category is that of the Municipal bond funds, issued by local governments. Other types of classification are according to returns or term of maturity. Term of maturity refers to whether the investment is long, short or medium term.
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