What are Bond Funds?
Bond funds are a type of mutual fund that invests in bonds. A bond is issued by a government or corporation and consists of debt capital, which can be paid back at specified intervals (usually annually) with interest. Bonds are rated according to their risk – higher-risk results in the issuer paying out more interest – and maturity date.
If you are investing into bond funds, they purchase the bonds for you (and pay them off with the interest that is due on your investment) – so essentially you are invested in a bundle of different bonds. Bond funds can be a great way to diversify and spread your risk across many companies or governments without having to individually purchase hundreds of these bonds yourself.
There are numerous Bond Funds available, and investors need to decide which bond fund would suit their needs best. It’s important to look at each Bond Fund company’s performance history before putting any money into Bond Funds. Your Bond Fund might have done well for a few years but it may go weak after 5 years if it is not good for example.
Another factor to consider when choosing Bond Funds is how well the Bond Fund company manages your Bond Funds. Some Bond Funds charge high fees, which goes against what a Bond Fund is supposed to represent – a low-cost alternative to having to purchase hundreds of individual bonds.
Most Bond Funds have performance histories that are measured over several years (5-10yrs) but choosing Bond Funds should be done on an Individual basis.
Below we explore some of the most common kinds of bond funds.
Government Bond Funds
Government bond funds invest in bonds from the government and typically offer a low level of volatility and very secure returns. They are considered to be some of the safest mutual funds out there.
High Yield Bond Funds
High yield bond funds invest in very risky bonds that offer potentially huge returns but can quickly become worthless if the issuing company goes bankrupt or defaults on their loan. So these are only recommended for investors who have a high risk tolerance and who won’t need the money they’re investing within the next 10 years or so.
Corporate Bond Funds
These sell bonds from corporations to raise money for their company. They are also among the safest types of bond funds in terms of low volatility and secure returns, as most corporate firms are large and stable enough to pay back their loans. However, they do carry slightly more risk than government bonds.
Municipal Bond Funds
Municipal bond funds invest in bonds from large cities and states that have issued them to fund projects, with the main difference between these and government based bond funds (besides location) being that they are not guaranteed by the federal government (which makes them less secure). So their returns can be higher but they also can be more risky.
Preferred Stock Funds
Preferred stock funds invest in stocks that pay out dividends (like most stock funds) but have a slightly different purpose than most of the other kinds of mutual funds out there. Instead of focusing on general returns, these tend to focus on accumulating enough money for retirement or investments for their children’s college tuition because they have a fixed payout date (which also means that their returns are not as high as other types of funds).
International Bond Funds
International bond funds invest in bonds issued by companies and governments outside of the US and can be a good way to get stronger returns than you would with domestic bond funds for slightly increased risk. A few examples of these include the T Rowe Price International Bond Fund , the Fidelity Global Bond Fund , and the Vanguard Total International Bond Index Fund .
Balanced Funds
Balanced funds are mutual funds that invest in both stocks AND bonds and have been extremely popular recently as they’ve allowed investors to achieve a healthy balance between higher returns on their stock investments AND keep their money a bit safer by having bond investments as well. Most balanced funds are also considered to be the safest of this category, since they’re investing in both stocks and bonds. Some examples include the T Rowe Price Balanced Fund , Vanguard Life Strategy Moderate Growth Fund , and the Fidelity Freedom Fund.
Targeted Funds
Targeted funds are mutual funds that invest in a certain group of stocks. For example, you might have a Targeted Technology Fund that invests only in the technology sector (companies involved in IT and other advanced technologies), or a Targeted Biotechnology Fund that invests exclusively in companies involved in biotechnology.
Bond/CD Funds
Bond/CD funds invest your money into bonds AND certificates of deposit (CDs) to create higher returns than you’d get from just investing in either one on their own. A few examples include the T Rowe Price Tax Free Bond Fund , Fidelity Total Bond Market Index Plus , and Vanguard GNMA Exchange Traded Fund . Similarly, there are also some bond/retirement funds out there such as the T Rowe Price Retirement 2055 Fund , the Fidelity Freedom 2055 Fund , and the Vanguard Target Retirement 2055 Fund that invest in stocks, bonds, AND annuities to help you plan for retirement.
Market Index Funds
Market index funds are mutual funds that simply invest in a variety of stocks from different companies with high potential returns (usually for fairly short periods) but they don’t really pinpoint which stocks they’re investing in and tend to have slightly higher risk than other types of funds. Two examples include the Schwab S&P 500 Index fund and the Vanguard Total Stock Market Index .
Sector Specific Funds
Sector specific funds are like targeted stock funds except they focus on just one specific sector within a certain industry or niche market. For example, instead of having a Targeted Technology Fund that invests in everything technology-related, you might have an Aerospace & Defense Sector Specific Fund that only buys stocks from companies involved with defense or aerospace. 12. Dividend Funds . These are similar to regular stock funds except they focus on stocks that pay out dividends as opposed to those without dividend payment and their goal is to generate returns by collecting the dividends paid out by these companies rather than share price growth (which can be slightly less risky since you’re not relying on a company’s profits). A few examples include Vanguard Qualified Dividend ETF , T Rowe Price S&P Mid Cap Stock Fund , and Fidelity Equity Income.
Balanced Allocation Funds
Balanced allocation funds are mutual funds that invest in a variety of assets to create a balanced portfolio containing stocks, bonds, cash, and other options that are deemed safe for your specific investment strategy. For example, if you’re young and looking long-term (such as 30 years or more) then you might have an aggressive asset allocation with the idea to invest in some risky stock options along with safer investments such as bonds. Conversely, if you’re older then you might take on less risk since there’s not much time left before retirement so you’d put more money into bonds or other holdings that were less volatile but still provided decent returns. A few examples include the T Rowe Price Balanced Fund , Fidelity Freedom 2050 , and Vanguard Life Strategy Moderate Growth.
Hybrid Funds
Hybrid funds are a mix between both stock and bond mutual funds. A good example is the Vanguard Life Strategy Moderate Growth Fund which invests 50% of your money into bonds and 50% of it into stocks.
Government Bond Funds
Government bond funds invest in government treasury bonds (which usually have lower risk compared to other types of bonds) but again, they’re a bit more risky than just investing in regular stocks with the primary purpose to provide returns through interest rather than share price growth over time. Two examples include the Vanguard Short-Term Treasury Fund and Schwab U.S. Treasury Money Fund.