Why Consider Investing in a Corporate Bond Fund?

Investing in a corporate bond fund is something that many investors never consider. A corporate bond fund is a mutual fund that invests in corporate bonds. There are a variety of different corporate bond funds and strategies of investment employed by them. Here are some things to consider about investing in corporate bond funds. 

Corporate Bond Funds

In order to decide whether you should invest in a corporate bond fund, you need to first understand what it is. In fact, you need to understand what a corporate bond is first. When a corporation wants to raise some money, one of the options that they have is to sell corporate bonds. When you invest in a corporate bond, you are loaning your money to a company for a certain period of time. They pay you interest payments and then you can get the initial investment back at the end of the term. 

Benefits of Corporate Bond Funds

  • Steady return- Corporate bond funds can provide you with a steady return on your investment. If you like to get a nice return without taking a big risk, corporate bond funds are a great way to go. They have been proven to be consistent over the long term.
  • Passive investment- This form of investment is considered a passive one. You do not have to make any of the individual investment decisions once you get involved. Buying bonds can be a complicated process on your own. You have to determine the value of the bond and you typically have to deal with a bond broker. You then have to decide when to buy and sell the bonds. With a bond fund, you just buy your shares and a fund manager takes care of all of those tough decisions for you. You get the return without any of the hard work.
  • Diversification- Investing in one corporate bond can be risky. You never know how the company will do. If they go under, you could lose your entire investment. With a corporate bond fund, you never have to worry about this. A corporate bond fund buys and sells many different bonds as part of their portfolio. Therefore, one company going under is not going to devastate the portfolio like it would for an individual investor. 

Risks

  • Bad strategies- There are many different investment strategies that bond fund managers could employ to invest. When you hold shares of the fund, it could negatively affect your investment. For example, there are many bond funds that invest in junk bonds. Junk bonds are bonds that pay a higher rate of interest in exchange for investing in a company with questionable credit. If several of these companies go under it could hurt the portfolio.
  • Opportunity cost- While these funds are steady, you could potentially make a higher return elsewhere. When the stock market is good, it can outperform bonds and bond funds. 
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