Bond Funds:Types of Funds

A bond fund collects money from several investors and has professional fund managers who invest this money in a range of debt instruments. This may include corporate bonds, municipal bonds, convertible bonds and a plethora of other financial instruments.

Yield on Bond Funds

A bond fund typically pays periodic dividends, including interest payments and capital appreciation. Usually bond funds pay higher dividends than CDs and money market accounts.

The calculation of yield depends on the selection of debt instruments. For example, corporate bonds may involve monthly payments, while in case of treasury bonds, strips and municipal bonds, returns are remitted on maturity, which could range from six months to 40 years.

The most commonly used measure is the 30-day annualized yield, which takes the yields of all the bonds in the bond fund and averages it over the past 30 days. However, this figure does not indicate the fund's future yield. It does help in comparing bond funds from different companies.

Benefits of Bond Funds

Professional Management

1. Time tested expertise and detailed security analysis by fund managers.
2. Relief from comparing maturity period, tax benefits and issuer creditworthiness.

Diversification

1. Investment in a variety of bonds delivers better results.

Liquidity and Convenience

1. Freedom to reinvest income dividends and undertake additional investments.
2. The initial amount of investment is relatively low.
3. Exemption from tax burden via municipal bonds.
4. Secured returns by treasury securities.

Back

Keywords:

Bond Funds, Types of Mutual Fund, Open ended Mutual Fund, mutual fund, mutual fund companies, Close ended Mutual Fund, Advantages of Close ended Mutual Fund, tata mutual fund, icici prudential mutual fund, investment, insurance