3 Reasons to Stay Away from Bond Funds

Investing in bond funds has become a popular thing to do in recent years. While investors liked the potential of bonds, many of them did not feel comfortable navigating the market alone. For them, bond funds were invented and saw some success. However, here are a few reasons that you might want to stay away from bond funds. 

1. No Control

One of the biggest drawbacks to investing in a bond fund is that you have no control over what happens. You buy a share into the bond fund and essentially give your money to the fund to use. The fund will be directed by a fund manager that makes the investment decisions for everyone. Therefore, you have thousands or millions of people that have their money at stake, with only a select few making the investment decisions. They decide what bonds to buy, when to buy them, and when to sell them. Therefore, if you are not a passive investor, this type of investment would most likely not be for you. You basically just give them your money and then collect a return when you cash in your shares. 

2. Limited Returns

Another reason that you might want to stay away from bond funds is that they offer limited returns. Bond funds are backed by bonds. A bond, by nature can only earn so much interest during its lifespan. Most of the time, the returns are not that high when you compare them to other investments. For example, the stock market has consistently outperformed bonds over the long haul. As an investor, your job is to increase your portfolio as much as you can. When you tie up your limited capital in bond funds, you are missing out on potentially greater opportunities in the stock market. When you buy a stock, there is no cap on what you can earn. A stock could triple or quadruple your investment. With a bond, you only get the amount of interest that is agreed upon in the contract despite how well the company does that issued it. 

3. Bond Fund Fees

When you get involved in a bond fund, there are certain fees that you will have to worry about. You might have to pay a fee to get in and then other fees as well. The most common type of fee is a yearly maintenance fee. This means that just because you are involved in the investment, you have to pay the fund managers a fee for their work. So you get limited control over the investments and then have to pay a fee to the person that is controlling them. 

When the investment is not bringing in a large return every year, the fee can cannibalize most of the profit that you make. This then makes the return that you get from the bond fund even smaller than it already is. This can tip the scales even more in favor of stocks as an investment tool. 

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