Investing in bond mutual funds is very simple. Bond mutual funds offer investors many of the benefits of individual bonds. Like stock mutual funds, the differences are that bond mutual funds come with less risk than investing directly in bonds.
Most of the key features of bond mutual funds are the benefit of diversification and professional management. With a bond mutual fund, investors get the benefit of fixed income professionals financial management and being in a pooled fund. By investing in bond mutual funds, investors are not holding a single or few individual bonds, but they’re holding hundreds of bonds where the likelihood of these bonds disproportionately affects their results.
As a stock mutual fund, bond mutual funds give investors an opportunity to pool capital with other investors to buy shares of a portfolio of bonds. Bond mutual funds may be actively or passively managed. The bond mutual funds typically follow a particular type of bond, corporate or municipal. They tend to pursue a set maturity strategy, whether short term or long term.
Some of the benefits of bond mutual funds include:
• Liquidity: Investors can buy and sell shares of bond mutual funds as easily as buying shares of stock. Unlike stock, orders to buy mutual fund shares are executed once per day, after the market closes.
• Dividend reinvestment: Funds are likely to be easier for investors to reinvest their income payment dividends back into the fund to keep building investments.
• Regular income: As an alternative to reinvesting dividends, most bond funds give investors the option to receive monthly payouts, providing a steady stream of cash for investors who want the income benefits of bonds.
• Possible tax-free income: Depending on investor’s tax bracket and stage of life. For instance, investors might prefer to own municipal bond funds that offer the potential for tax-free income. In general, interest paid on the funds is exempt from federal income tax and may be exempt from state and local taxes.
Bond mutual funds, like stock mutual funds, come with management fees to compensate fund managers for actively managing the bonds bought and sold within the fund. This fee is expressed as an expense ratio and indicates the fees the investor incur based on investment each year. For example, a bond fund with an expense ratio of one percent will charge you 20 USD per year on your 2,000 USD investment.