Understanding Corporate Bond Funds

Corporate bond funds have become an increasingly popular form of investment over the years. These funds invest solely in corporate bonds and can provide a nice return on your investment. Here are the basics of corporate bond funds and what they can do for you as an investor.

Corporate Bonds

In order to understand what corporate bond funds are, it helps to understand what corporate bonds are. When a corporation wants to raise money, it can issue bonds to investors. Investors come along and purchase the bonds for a certain amount of money. The company that issued them pays the investors a regular rate of interest over the life of the bond. Then at the end of the bond term, each investor gets all of his or her original investment back. This represents a relatively safe form of investment, as the only real risk is if the company goes bankrupt. Even then, as creditors, investors who bought bonds are at the front of the line to get their money back. 

Corporate Bond Funds

Corporate bond funds are like mutual funds that invest in these corporate bonds. When you invest in a corporate bond fund, you are pooling your resources together with many other investors to buy these bonds in bulk. You own a share of each bond that is purchased. A fund manager makes the specific investment decisions for a fund. 

Benefits of Corporate Bond Funds

  • Passive investment--When you invest in a corporate bond fund, you are taking on a passive form of investment. You do not have to make any decisions about which specific bonds to buy and in what quantity. You do not have to value the bonds and determine when to buy or sell them. This is all done by the bond fund and the fund manager. Therefore, you can get involved in the bond market without worrying about all of the details that go with it. 
  • Diversification--While investing in bonds is relatively safe, putting all of your investment capital into a single company can be a recipe for disaster. Even if you, as an individual investor, have three or four different companies that you have bonds from, this still represents a high level of risk. Those particular companies could go bankrupt and have very high debt loads, with few assets. If you invest in a corporate bond fund, you are investing in many different companies and bonds. Therefore, your risk is diversified over an entire portfolio of bonds instead of having all of your money in one place. 
  • Steady growth--Most bond funds that invest in high quality bonds have shown that they can present investors with slow steady growth. The bonds receive a steady stream of interest over the years and that increases the overall value of the bond fund. As a partial owner in the fund, you stand to make a nice return on your investment over the years. 
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