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What You Need to Know About Bond Funds – A 101 Guide

While a bond [1] is a debt [2] security [3] that represents the authorized issuer’s obligation to repay the principal plus interest of the debt, a bond fund [4] is a pool of money that invests in bonds [1]. Most bond funds pay higher dividends than CDs or money market funds, and are considered less risky than stocks. That’s why many financial planners recommend having these types of bond funds within investment portfolio, especially as we age.

Types of Bond Funds
When we classify bond funds, there are generally 4 main types:

Benefits of Bond Funds
As briefly touched at the beginning of the article, bond funds offer many advantages:

  1. Reduced Volatility – Even though the prices of bond funds changes, they are generally much less voltatile than stocks or stock funds. Therefore, a portfolio with a bond fund can help balance the wild swings of a stock only portfolio.
  2. Income – Since bond funds usually pay a monthly dividend [10] from the interest payments of the bond, investors looking for income [11] welcome these types of funds.

Associated Risks
A common misconception of bond funds is that you don’t lose money. Unfortunately, that’s simply not true. As with any investments, there are risks, so consider the following before investing in a bond fund.

What This Means to You
As circumstances differ case by case, it’s best to consult with someone who understands your situation and can offer suggestions that best suits you. Having said that, most people will tell you that any portfolio can use a bit of allocation to bond funds, because of its relative stability and its income generating abilities.

Many people also believe that stocks funds always outperform bond funds, which is again untrue. So if you have never invested in bond funds before, now is the time to take a serious look at it.