What is a Bond Mutual Fund?

A bond mutual fund is a form of investment that utilizes investments in corporate bonds to help their shareholders realize a return. There are many different forms of bond mutual funds out there that you offer investment potential. Here are the basics of bond mutual funds and how they work. 

Investing in Bonds

Many investors choose to invest in bonds because of their steady return and because they are relative safety when compared to other investments. However, actually purchasing the bonds is a little bit complicated. A bond mutual fund is a fund that buys and sells bonds as a way of building the portfolio. You buy shares in the bond fund and a fund manager uses that money to invest in bonds. This type of investing in bonds is an indirect way for you to profit from the market. 

Benefits of Bond Mutual Funds

  • Diversification- When you invest in a bond mutual fund, you are getting a piece of a very diversified portfolio of bonds. As an individual investor, you may only be able to afford a few different bonds. Therefore, the bankruptcy of one company could potentially devastate your investment. When you buy into a bond mutual fund, you get a share of a big basket of bonds. Many people are essentially pooling their money together and the money is being used to buy bonds.
  • Ease of purchase- Buying into a bond mutual fund is extremely easy. You can do so with any financial broker or trading account. You just buy shares of the mutual fund like you would with any other mutual fund. This makes it much easier to buy into a bond mutual fund than if you were to invest in bonds by yourself.
  • Passive investment- With this type of investment, you do not have to make any trading decisions on your own. The fund manager takes care of everything for you. They decide when bonds will be bought and sold. They decide which bonds should be purchased. You just give them your money and they take care of the rest. 

Different Forms of Investment

Although all bond mutual funds invest in bonds, there are many different ways that your chosen fund may invest. Commercial bonds are rated on a class system by financial experts. Standard & Poor's has the most well-known rating system and it goes from AAA to D.

The companies with a AAA rating have the best credit histories and business models. There are many bond funds that invest solely in AAA companies. However, there are others that invest in companies that are in the lower end of the scale. This means that you will take on higher risk and get a higher return on your investment. There are even bond funds that invest solely in certain government bonds. This is one of the safest types of bond mutual funds around. 

Before you select a particular bond fund, you need to make sure that you understand the strategy that they employ. They all have different levels of risk and potential reward.

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