How To Invest In Bond Funds
Learn how to invest in bond fund is as easy as following these steps. Investing in bond fund is a great way to diversity your investment and reduce risks, because bond fund is an investment fund that managed by professionals who selects a portfolio of bonds for you for a small fee. So, you do not have to spend all that time and energy to analyst each individual bond in a vast market. There are many types of bond funds available, this article will guide you to decide what fits your expectation the best.
- Let the professionals do the work. Why do homework when you do not have to? Let the professionals pick out a portfolio of bonds for your investment. You job is to pick which professional you want to invest with and the type of bond fund that fits your comfort level.
- Invest in active managed bond funds. This type of bond fund is the most common bond fund you will see on the market. The bond fund managers actively buy and sell bonds in pursuit of their investment objective. You can buy and sell shares of the bond fund on the open market.
- Invest in index bond funds. These bond funds are not actively managed. They are designed to track the performance of certain bond index, such as the Lehman 10 year bond index. Therefore, when the index changes, the value of your investment changes as well.
- Invest in close-end bond fund. This type of bond fund is much like the active managed bond fund; its price is determined by the principle of market demand. It is also actively managed by managers. Unlike the active managed bond fund, close-end bond fund maybe leveraged, which means that it can profits greatly during favorable market condition, but the risk is equally high in an unfavorable market.
- Look beyond normality. There are other ways that you can get exposure to bond market without investing in a bond or bond fund. Exchange-traded funds (ETFs) are those funds that mirror the performance of a given index. In this case, you can invest in an ETF that tracks a bond index, such as the Citigroup Long-Term High Grade Corporate Index.
Tips: Higher yield definitely means higher risks. Bond funds and ETFs carries a principle risks, meaning there is a chance you won’t get all your money back that you invested. Investing in bond funds with higher fees will erode into your profits down the road. Consider the tax benefits. Some bond funds that invested in municipal bonds are exempted from federal income taxes.