Bond Mutual Funds

The IMF predicts the US economy to slow down.

The outlook for Western Europe and Japan isn’t too great either.

Headline inflation has increased in both advanced as well as emerging economies.

Oil price has doubled over the last six months.

There is a possibility of deeper economic downturn.

The stock markets of most of the countries have tumbled during recent times.

These sentences are not something new for regular readers of newspapers, especially financial newspapers. Everybody would have been affected as a result of the consequences of these statements. During tough times such as these, where would you put your money? Stock market - No that would be suicidal! Banks – rate of return would be too low. Then where?

One possible place is mutual funds. Mutual funds are a lot safer than shares and earn better returns than banks. But one must be careful while choosing a mutual fund during recession times. It is always a better bet to invest in bonds during recession. It ensures regular interest payments and possible capital appreciation when bond price increases. Bond mutual funds enable you to get just that.

As the name suggests, these funds invest in bonds and debt securities. These funds aim to protect the invested capital and at the same time ensure regular income from interest payments. Just like any other mutual fund, these funds too have a Net Asset Value (NAV) which is the value of each share of the mutual fund. It is nothing but what one must pay to get one share of the fund or what one gets when a share of the fund is sold.

5 reasons why one should invest in bond mutual funds:
1. They are a lot less riskier than stocks
2. They provide stability
3. They are diversified – the portfolio will be across many different bonds thereby reducing the risk of default and ensure regular payments.
4. Certain types of bond funds are exempt from federal and/or state taxes
5. They are more liquid than bonds.

Among these advantages, the last one is the most important. It is the reason why one must buy bond funds rather than individual bonds. They can be easily bought and sold in smaller units. On the other hand, it is not so easy to buy bonds and hold them. Bonds are not as liquid as bond funds. Hence it is better to buy bond funds rather than bonds.

Types of Bond Funds

There are many different types of these funds. Of these, some of the major ones are Government bond funds (or Federal bond funds), Municipal bond funds, corporate bond funds etc.

Government Bond Funds

These funds invest in debt securities issued by the government such as the Treasury bills, Treasury bonds, Treasury notes, Mortgage-backed securities issued by government agencies etc. Some of these funds are also exempt from state and/or local taxes.

Municipal Bond Funds

These funds invest in securities issued by state and/or local governments for doing public works such as building bridges, laying of state highways, constructing schools etc. Some of these funds are also exempt from federal taxes. Since they have the backing of the federal government, they are considered to have a very high credit rating.

Corporate Bond Funds

These funds invest in the debt securities of corporations. They do not have the backing of the government; hence they are a bit more risky than the other two types of funds. However they pay out much higher income than the government funds.

Apart from these funds there are many other types of bond funds such as the zero-coupon funds - that invest only in zero coupon bonds, international funds - those that invest in international bonds, convertible securities funds - which invest in convertible securities (bonds that can be converted to stock) etc.

These are some of the funds that an investor can look forward to invest. However there are many more alternatives to invest. To know about investing in mutual funds visit Investing in Mutual Funds and to get an idea as to how mutual funds work visit Mutual Funds.