Bond Funds - Some Facts You Might Not Know

Bond instruments are not exactly for the birds simply because of their complexity in making forecasts, choosing the best investments and then earning profits from these instruments. Add in the relatively high costs for initial investments of $5,000 and you are justified in backing out of bond instruments as investments. The good news is that there are bond funds that allow for investments in bonds sans the high levels of complexity and capital required by bonds.

Of course, before you can actually enjoy the benefits of these funds, you must first know a few basic facts about them. We cannot overemphasize that these funds are as high-risk as you can get to the point of bankruptcy when you play your cards incorrectly.

What Are Bond Funds?

Simply put, bond funds invest mainly in bonds and other instruments of debt. The specific types of debt instruments in which the fund will be invested depend on the investment goals set by the fund manager. However, the most common debt instruments include municipal, corporate and convertible bonds as well as debt securities such as mortgage-guaranteed securities.

Take note that bond funds represent the pooling of the investors' money into a single fund that is then invested in bonds and other debt instruments. The investments are usually diversified in that there are many different types of debt instruments in a single bond fund. The reason for diversification is obvious: to maximize the profits while minimizing the risks.

What Are The Pros and Cons Of Bond Funds?

A bond fund is a popular option for many investors for the following reasons:

• Fund managers are professionals in their fields who dedicate their time to looking or the best possible investments in bonds and debt instruments. You will then be spared the trouble of researching on the issuer's credit rating as well as the bond issue's market value, among other factors that affect bond value. Fund managers also use a wide variety of hedging techniques that protect the investors' money even in the face of adverse economic trends. In short, you have a better chance at earning profits from bond funds than from being an individual investor.
• The fund's investments are so diversified that even when one investment performs poorly in the market, its negative effect on the totality of the fund will be negligible. Think of it as offsetting. As an individual investor, your portfolio may not be as diversified because of capital constraints.
• The fund's income from investments is automatically reinvested in other debt instruments. Thus, you will hear of bond funds that are reported to grow by leaps and bounds.
• Most important of all, you can easily sell your shares in the bond fund at any time. You don't have to be tied to bond maturities, which can be difficult as an individual investor.

Well of course, there are disadvantages to bond funds. It can lose money and it is said that nine out of ten funds will lose money especially with the recession still in effect.

But just think of the possibilities when you were brainy enough to be in the lucky tenth of the bond funds that do make money for their clients!