Bond funds, such as municipal bonds, allow you to invest your money with federal, state or local governments, corporations and other entities. Investments are made with individual entities at your discretion. This is a great way to hedge some of your money against more volatile investments in the stock market or Forex market, but it isn’t entirely without risk. You can buy these investments on your own, and the maturity date is set at the time you make the investment.
Bond funds are a bit different because you place your money with a fund manager and maintain a portfolio of which can change on a routine basis. The manager will determine which one to invest your money in, and they typically don’t hold them until it reaches maturity. This is more of an investment game where some bonds are called early, others are sold early, and new ones are purchased routinely.
You give up immediate control of your investment when you allow a professional to oversee your bond portfolio. For many investors, it’s worth giving up the control because these funds can produce a consistent side income or allow you to save money for retirement and future expenses rather quickly. Of course, the profit potential for your fund is determined by the type of bonds featured in your portfolio and the professional’s proficiency at overseeing the fund. When the fund is managed properly and the best investments are made on a routine basis, the profit is typically worth the risk involved.
You do assume the greater risk if you would when buying individual bonds with guaranteed maturity dates. This is a fluid investment that is constantly changing, so you aren’t guaranteed interest payments of predictable amounts. It all depends on what your manager takes on and the terms associated with each.
You can control your risk level by investing in funds that specialize in safer types of bonds. When low-risk bonds are used exclusively, you have less risk of losing money but will typically earn lower interest payments as well. When you take on higher-risk bonds, you have the potential to earn greater interest payments but have the greater risk of taking a loss.
Differences between them often come down to the rules governing investment decisions. When you pay attention to the type of fund, you will have greater understanding of your portfolio. You also control the risk level involved and your potential for profit by selecting the right type of fund for your investing style.
Investment-grade type generally includes low-risk securities issued by the federal government and U.S. corporations, but they may also include mortgage-backed securities. If you want to increase your earnings potential and are willing to accept more risk, consider high-yield bonds. Bonds in this type of fund may include floating-rate bank loans and high-yield municipal bonds as well as other unrated bonds.
There are also multi-sector, which include investment-grade and unrated bonds. These mixes depend on the professional overseeing the fund, but the goal is to blend high-risk investments with low-risk investments to safely increase the potential for profit.
One other thing to consider when investing in a bond funds is whether you will invest in international and global bonds or stick with those issued within the U.S. This is an important factor that can determine the risk level of your investment.
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