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What is my current Investment Status?
What are my Investment Objectives?
How much risk am I willing to take?
How Price and Yield are related in Bonds?
How Interest Rate and Maturity in Bonds are related?
How Interest Rate and Inflation are related?
What are Tax Implications of Bond Fund.
What are the Pros and Cons of Bond Mutual Fund?
What is the difference between Bond Fund and Bond?
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Why invest in Bonds?
Most personal financial advisors recommend that investors maintain a diversified
investment portfolio consisting of bonds, stocks and cash in varying percentages,
depending upon individual circumstances and objectives. Because bonds typically have a
predictable stream of payments and repayment of principal, many people invest in them to
preserve and to increase their capital or to receive dependable interest income. Whatever
the purpose-saving for your children's college education or a new home, increasing
retirement income or any of a number of other worthy financial goals-investing in bonds
can help achieve your objectives. That's especially true for retirement planning. While
these plans offer greater individual freedom in selecting from a range of investment
options, investors must also be increasingly self-reliant in securing their retirement
lifestyles.
Most personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. For example, older or retired investors may typically have a higher proportion of bonds in their portfolio than younger investors. Whether you already have investments in stocks or bonds or are just beginning to invest, diversity can provide some protection for your portfolio, so if one sector or asset class is in the midst of a cyclical downturn, the rising value of another class of assets may help offset the negative impact.
Because bonds typically have a predictable stream of payments of interest and repayment of principal, many people invest in them to receive interest income or to preserve and to accumulate capital. If you are looking for current income, you will most likely be interested in bonds that pay an interest rate that stays fixed until maturity with interest that is paid semiannually. However, if you are saving for retirement or a child's education or other capital accumulation goal, you may wish to consider investing in zero coupon bonds which do not have periodic interest payments. Instead, they are sold at a substantial discount from their face amount and the investor receives one payment at maturity that is equal to the purchase price (principal) plus the total interest earned, compounded semiannually at the original interest rate.
A bond's maturity refers to the specific future date on which the investor's principal is expected to be repaid. Bond maturities generally range from one day up to 30 years. Your choice of maturity will depend on when you want or need the principal repaid and the kind of investment return you are seeking within your risk tolerance. Generally, the longer the maturity, the greater the return but long maturities also entail greater risk.
Virtually all investments have some degree of risk that you might lose some or all of your investment. When investing in bonds, it's important to remember that an investment's return is linked to its credit as well as market changes. The higher the return, the higher the risk. Conversely, relatively safe investments offer relatively lower returns. Bond choices range from the highest credit quality. In assessing your tolerance for risk, ask yourself, "What will I do if my investment is not there when I need it?" You should also be aware that if you have to sell a bond before it matures, you will receive the prevailing market price, which may be more or less than its original price. The value of bonds fluctuates with the market, varying in the opposite direction of movement in interest rates. Bond funds' values fluctuate in the same way.
From the time a bond is originally issued until the day it matures, its price in the marketplace will fluctuate according to changes in market conditions or credit quality. The constant fluctuation in price is true of individual bonds-and true of the entire bond market-with every change in the level of interest rates typically having an immediate, and predictable, effect on the prices of bonds. When prevailing interest rates rise, prices of outstanding bonds fall to bring the yield of older bonds into line with higher-interest new issues. When prevailing interest rates fall, prices of outstanding bonds rise, until the yield of older bonds is low enough to match the lower interest rate on new issues.
Because of these fluctuations, you should be aware that the value of a bond will likely be higher or lower than its original face value if you sell it before it matures.
Changes in interest rates don't affect all bonds equally. The longer it takes for a bond to mature, the greater the risk that prices will fluctuate along the way and that the fluctuations will be greater-and the more the investors will expect to be compensated for taking the extra risk. There is a direct link between maturity and yield. It can best be seen by drawing a line between the yields available on like securities of different maturities, from shortest to longest. Such a line is called a yield curve. This is the answer to the question.
Changes in interest rates don't affect all bonds equally. The longer it takes for a bond to mature, the greater the risk that prices will fluctuate along the way and that the fluctuations will be greater-and the more the investors will expect to be compensated for taking the extra risk. There is a direct link between maturity and yield. It can best be seen by drawing a line between the yields available on like securities of different maturities, from shortest to longest. Such a line is called a yield curve. This is the answer to the question.
Bond investments are attractive for two key reasons:
Some affluent investors use municipal bond funds as a
source of tax-exempt interest income. Because municipal bond funds tend to have lower
before-tax interest yields than those on taxable bonds, this investment is usually
appropriate only for people in high tax brackets.
Finally, investors may use short-term, high-quality bond funds as an alternative to
money market funds. While this strategy can provide higher returns, the investor could
lose some principal because of fluctuating bond prices.
Before buying shares in a bond fund, investors should understand the
fundamentals—including the potential risks and rewards—of different types of
bond funds
Like all mutual funds, a bond fund pools money from many
investors and uses the money to buy securities that meet the fund's stated investment
objectives and policies. The decisions to buy and sell individual bonds are made by a
professional portfolio manager.
A bond fund offers the following important advantages to investors:
Potential Disadvantages
In addition to its advantages, a bond fund also has some
potential disadvantages.
Buying individual bonds can be very expensive for many investors, not only because they are issued in large denominations, but also because paying the bond dealer’s cut in the secondary market can be very expensive on relatively small bond purchases.
While most bonds do have a fixed maturity date – the contractual date upon which the company is obligated to pay back all of the principal -- it can be difficult for an individual to stay the course and hang on until maturity, when a bond’s price is dropping.A bond fund manager, on the other hand, who can react to different influences in the bond market might actually dollar cost average the portfolio as bond prices fall – something an individual investor might find hard to do.