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The Case for Bond Funds
Bonds can diversify investments, produce steady income and are generally less volatile than stocks. Bond mutual funds, which pool many bonds into a single portfolio, offer these advantages...and more.
Advantages of Bond Funds
A Word About Income
Like Any Mutual Fund
Advantages of Bond Funds
Low minimum investments
Buying bonds through a licensed broker usually requires a minimum of $5,000 to $25,000. Investing with a broker also may involve sales charges and commissions. Bond funds, on the other hand, often set minimum investments of $2,500 and may include a portfolio of many individual bonds.
Diversification
Bond funds enable you to invest in a more diversified portfolio of bonds than you otherwise might be able to afford. To invest in 100 individual bonds through a broker, for example, you might need as much as $500,000.
Bond funds also may reduce your overall investment risk. Diversification among stocks and bonds can help smooth out volatility and produce a more balanced portfolio. That's because stocks and bonds often respond differently to changes in the economy.
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Total Returns of Stocks and Bonds During Market Downturns
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7/31/01 to 9/30/01 |
6/30/90 to 10/31/90 |
7/31/87 to 12/31/87 |
12/31/72 to 10/31/74 |
| Bonds |
2.47% |
2.93% |
2.97% |
6.17% |
Stocks |
–13.82% |
–14.09% |
–21.39% |
–32.99% |
Stocks = S&P 500 Index, Bonds = Lehman Bros. Intermediate Government/Corporate Bond Index
Source: Ibbotson Associates. Past performance is no guarantee of future results.
Professional Management
Professional money managers monitor bond fund portfolios with an emphasis on maximizing returns and minimizing risk.
Convenience and Accessibility
When you want money from a bond fund, you simply sell enough shares to equal the amount you need (taxes will be due on any gain you realize). The sale of individual bonds requires finding a buyer on the open market.
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A Word About Income
Bond funds may appeal to you if you want steady income, perhaps to supplement other retirement assets. But you'll need to balance your desire for income with your tolerance for risk, since funds that offer the highest yields typically involve more risk.
For the highest potential income, consider corporate high-yield bond funds or long-term bond funds. If you want to balance risk and reward, you might consider funds that invest in securities based on pools of mortgages. These can include Ginne Mae funds, which guarantee timely payment of principal and interest. Remember, fund shares are not guaranteed.
However, not all bond funds pay current income. Zero-coupon bond funds don't make regular interest payments. Instead, fund shares rise in value until a specified maturity date, when principal and accumulated interest is returned in a single payment. Some investors prefer these funds for goals they hope to reach on a certain date, such as paying college costs, because they know in advance approximately how much these investments will be worth when they mature. Returns on these funds are not guaranteed, however.
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Like Any Mutual Fund
Bond funds (aside from zero-coupon funds) generally have no maturity date. Instead, fund managers purchase many different bonds with varying maturities. So there is no assurance you'll get your principal back at a predetermined date. Bond funds generally own a changing portfolio of bonds, so the interest rate paid to investors and the share price of the funds fluctuate with market conditions.
If you are seeking to diversify, reduce risk or increase your income, you may want to consider how bonds or bond funds fit your investment plans.
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Related Article: Investing in Zero-Coupon Bonds
This information is for educational purposes only and is not intended as investment advice.
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