Bonds are usually seen to be not as exciting as stocks. However, bonds can offer a level of stability that equities can’t generally match. This is particularly true of bond funds, which offer stability and diversification to a portfolio.
Basically, the main goal of any income fund is to get a return for investors by investing in a variety of bonds that generate a healthy and consistent income stream. For most funds, there isn’t a focus on capital appreciation, unlike funds that focus on equities.
Investors are tasked to learn about the characteristics of a bond fund that make it income-generating. Such nature should be tailor-fit to their investment goals.
Generally, many bond funds are seen to be less risky because a bond holder mainly receives a principal on the bond as long as the bond is held to maturity.
On the other hand, you have the risk of default, which can result to a partial or total loss of principal that can make some bond funds risky. It is therefore very important to find the risks involved in any investments including bond funds as the risk characteristics vary.
For instance, a fund that is fully invested in government-backed securities, like Treasuries, would be considered very safe. However, investors would have to be more cautious of the funds that are invested in mortgage-backed securities or junk bonds since these instruments have higher risks.
Most of us do not have the experience or skill set to manage a huge portfolio of bonds or the portfolio size to get a properly diversified portfolio of bonds. Additionally, many of us lack the time to conduct thorough research.
On the other hand, bond funds have the same advantage as any mutual fund in that they have portfolio managers and a research team who try to choose the best possible securities to add to the fund’s portfolio.
Thus, when you are investing in a bond fund, you can benefit from a managed investment and can own a share in several different bonds at a much lower cost than buying the bonds themselves.
One of the biggest investments to bond funds is the relative liquidity that it can bring to investors when compared to investments in individual bonds.
If you own company A corporate bond, you need to sell his or her holding in a rush, and you would have to check the market, or check with a broker for a current quote and see which entities might be interested in buying the bond.
This is not a particularly hard task, but because there may be a general lack of demand for the issue, selling the security at an advantageous price may not be easy.
Meanwhile, it will be very much easier to liquidate a position in a bond fund. If you want to sell or part of an investment, you can simply place a sell order with the broker and it will be executed that night or they can put in redemption with the fund, which needs to be executed within one week of the request.
Additionally, when selling a bond fund, you’ll find little difference between the selling price and the market value, excluding transaction fees.