What are Bond Mutual Funds? Types of Bond Funds
Bond funds are one of the more conservative professionally managed mutual funds around, in that they protect the invested principal and are invested in more stable debt vehicles, such as US government bonds, municipal bonds or corporate bonds. The mutual members receive a monthly or quarterly dividend, comprised of the interest paid on the investment, plus any capital appreciation of the shares. Hence, there is a regular income derived, often with the added benefit of being tax exempt.
US Government Bond Funds – these funds invest in debt securities issued by the US government. They include Treasury bills, Treasury notes, Treasury bonds, and also mortgage-backed securities, such as those issued by Fannie Mae and Freddie Mac. These are often exempt from state and local taxes, but not federal taxes. The greatest risks faced with these bonds are fluctuating interest rates and inflation.
Municipal Bond Funds – These funds invest in debt securities issued by state and local governments, to pay for specific projects, such as schools, highways and bridges. They are exempt from federal taxes, and in some venues, state taxes, making them popular investment vehicles. Since municipalities have been known to declare bankruptcy, however, these bonds are more risky than US bonds.
Corporate Bond Funds – These are the least secure of the bonds group, as they are not backed by any government entity. To offset this higher risk, they usually pay a considerably higher yield than either US or municipal bonds. Should the corporation find itself in financial trouble, however, these higher risk bonds can be rendered worthless.
There are several other types of bond funds, such as those that specialize in investing in zero-coupon bonds, international bonds, and convertible security bonds. There are also multisector bond funds that will spread their investments across several different types of bonds. Multisector bond funds are often selected for the higher risk portion of an investment portfolio, as the diversification protects the shareholder against downward spirals in one industry.
Investors usually choose mutual bond funds for two major reasons: regular income, and diversification. In some instances, as mentioned, tax exemptions make them even more attractive.
© What are Bond Mutual Funds? Types of Bond Funds
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