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What are Bond and Income Funds

| Monday, November 15th, 2010

For individuals looking for a fixed income from their financial investment, bond and income funds can be a good option. Bond funds focus primarily on bond investments, in combination with other types of debt securities. The type of bonds and debt instruments will vary according to the fund, but may include mortgage-backed securities, government and corporate bonds, and other bond investments. Some investors automatically think of bonds when they hear the term “fixed income.” However, there are actually many different kinds of income funds to choose from in addition to just bonds.

Understanding Bonds

Bond funds are often a good way of reducing risk while providing a dependable level of fixed income. They tend to be more stable as compared to many other forms of investments, which makes them a good addition to almost every portfolio. In many cases, the primary purpose of owning a bond fund is the ability to have a steady income stream, since these funds focus on income instead of capital appreciation. They are a good choice for somebody who is retired who may be looking to supplement their income. However, for the person looking to grow their investment, such as a younger person who is saving for their eventual retirement or parents saving for their child’s college education, other kinds of investments that focus on growth would probably be a better choice. Bond funds are commonly part of a conservative investor’s overall portfolio.

A low level of risk is also a feature of a bond fund. As a general rule, if a person holds a bond until it matures, they will receive the bond’s principle. However, there is always a risk of a default on the bond, which must be factored into the decision to invest. For this reason, it is always a good idea to closely research bonds before investing. For example, bond funds that invest in mortgage-backed securities will almost always carry more risk than a fund that invests in government-backed securities. Risk is also lowered because a fund generally purchases a number of different bonds, so the fund will likely still produce income even if one bond fails to perform. This can make investing in a bond fund more advantageous and less risky than investing in individual bonds. These funds are also professionally managed, further reducing the risk for the investor.

Understanding Income Funds

In addition to bond funds, there are other kinds of income funds which can be used to produce a fixed income. Income mutual funds generally invest in equities, debt, or a combination of the two. They usually have a good level of diversity, and are professionally managed. Income funds generally pay dividends or interest each month, and sometimes even pay both. There are many different kinds of income funds available, some of which consist of domestic investments while others focus on global or international investments. Fixed-income funds usually invest primarily in securities with stated interest rates and set maturity dates. Depending on the securities included in the fund, they can be a good choice for either a conservative or an aggressive investor. However, it’s important to understand that the return on an income fund is largely dependent on the interest rate.

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