3 Disadvantages of Zero Coupon Bond Mutual Funds

Zero coupon bond mutual funds are funds that allow you to create regular sources of income for yourself. However, this type of mutual fund has some potential drawbacks also. Here are three disadvantages of zero coupon bond mutual funds.

1. Taxes

One of the big disadvantages of this type of bond fund is that you are going to have to pay taxes on the interest that is accumulating in the fund. This means that you will have to come up with money from some other source because you are not actually going to be receiving the interest payments until a date in the future.

2. Volatility

Another potential problem with this type of bond fund is that share prices can be very volatile. The prices of this type of fund can fluctuate greatly depending on changes in the interest rates in the market. If interest rates in the market increase, the prices of your shares can depreciate rapidly.

3. Selling before Maturity

In some cases, investors have to sell their shares before the bonds mature. When you do this, you are potentially going to be sacrificing a good portion of the potential returns for the bonds. This is more suitable for those that can stay in the fund until maturity. 

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