Are Mutual Bond Funds a Long-Run Investment?

Investing in mutual bond funds can be a great way to create a steady source of income for yourself. It has become a very common form of investment over the last few years. Here are the basics of investing in mutual bond funds and whether it is a long-term investment.

What Are Bond Funds?

A bond fund is a mutual fund that is made up entirely of bonds. Bonds are debt instruments that can be issued by corporations and government organizations. These debt instruments can be purchased by investors for a certain amount of money. Then, the entity that issued the bond pays the bond holder an interest payment each month for the life of the bond. At the end of the bond term, the bond holder can redeem the bond and receive the full amount of the initial investment back. Buying shares of a bond fund is an easy way to get involved in the bond market without investing a substantial amount of money. Bond funds purchase hundreds or thousands of bonds for the portfolio of the members of the fund.

Regular Income

Purchasing shares of a bond fund provides you with a regular income payment from the fund. As a shareholder, you will receive a fixed amount of money each month from the interest payments of all of the bonds. Each bond in the fund provides the fund with an interest payment each month. Then the total amount of money is divided up amongst all of the shareholders. This creates a regular source of income for the bond holders.

Long Term Implications

Investors typically look at mutual bond funds as long-term investments. Bond funds will change in value and experience a bit of capital appreciation due to changes in the market interest rates. However, the capital appreciation will generally be quite small over time. The main value that a bond fund provides is in the form of interest payments. You can continue to receive these interest payments for as long as you hold shares in the bond fund and as long as the fund stays in operation. This can be a great form of investment for retirees or those who wish to create some sort of residual income for themselves.

There are fees associated with buying and selling these types of funds. Therefore, if you do not hold them for very long, the fees will cannibalize most of the profits that you make. This means that you will have to hold the bond fund for a certain length of time in order to benefit from the investment. You need to bring in enough interest payments to pay for the transaction costs associated with the fund. From that point on, all of the payments that you receive from the bond fund will be free profit. The longer that you hold the investment, the more profitable your investment becomes. This is definitely a "buy and hold" type of investment.

blog comments powered by Disqus
Scottrade