A bond fund is one of the popular investment pools. Basically, a fund that is invested in bonds or other debt instruments is called a bond fund; it is also known as a debt fund. Investments of bond funds may contain government, municipal, agency, corporate bonds and assets-backed securities. Some bond funds focus on covering the wide bond market by investing in both short and long-term bonds and some other bond funds focus on the narrower portion of the bond market investing in short-term treasury fund or a corporate high-yield fund. Usually, bond funds pay higher dividends and also pay interests twice a year and then refund the borrowed amount when the bond matures on a regular basis. In bond funds, a percentage of the borrowed amount is fixed as interest amount and it does not change usually. There is an operating value for all the bond funds and they charge the value in a different way.
There are many different types of bond funds and they are classified by various factors such as the term of the bond, types of yield, international bonds, convertible bonds, zero coupon bonds, and so on. Following are the most common types of bond funds used.
Government bonds
It is believed that government bonds are the most secure among all bond funds. These are excellent investment options for the risk-averse investors. They can be issued by the national government and state government agencies. Government bonds are known as sovereign debt at the national level. As a whole U.S Government bonds are known as “Treasuries” or “United States Treasury securities” and they are issued as treasury bills, treasury bonds, and treasury notes. Treasury bills mature within one year, treasury bonds mature in more than ten years, and treasury notes mature between one to ten years. Usually, the return is low in government bonds due to the safety.
Corporate bonds
Corporate bonds are a debt instrument, issued by corporations. The corporate bond market of the United States is the oldest, largest, and most developed markets, occupying a huge part of the entire bond market. Corporations are the prime issuer of bond funds, and huge corporations have significant flexibility in issuing debt; the maximum limit of the debt usually depends on whatever the market carries. Corporate bonds have fixed or changeable interest rates and are also of changeable maturity as they depend on the issuer. When the maturity of a corporate bond is less than five years, it is considered as short-term corporate bond. Likewise, the bonds of five to twelve years periods are intermediate bonds and the bonds which are more than twelve years period are long-term bonds. Some corporate bonds are specialized in ” investment-grade bonds” because these return higher dividends and almost correlate with risk; highly-rated companies issue these bonds. Other below investment category corporate bonds specialize in “high-yield or junk” bonds as they bear higher risk due to the prospective incapacity of the corporation to return the dividends. Comparatively, corporate bonds carry a higher risk than government bonds, which results in higher interest rates on corporate bonds.
Municipal bond
The municipal bond is a commonly used debt security and is also known as Muni bond. These bonds are issued by government bodies, basically to finance public service projects, including the construction of schools, roads, bridges, airports, seaports, and so on. Municipal bonds are typically free from federal taxes, and in some cases, state and local governments also offer them as tax-free debt. Municipal bonds are cheap and beneficial bonds and are good investment options for high-income individuals who require tax saving advantages. Compared to corporate bonds, default risk is very low in municipal bonds. Market price and interest rates of municipal bonds rise and fall irregularly as it is a fixed income debt security. This bond returns lower dividends than other taxable bonds and can be considered as one of the best debt instruments among all.
Agency bond
Agency bond is a secured debt security issued by government-sponsored agencies or federal budget agencies. These bonds are not fully guaranteed by the U.S. government since the issuer agencies are not all governmental. Some leading issuers of agency bonds are Government National Mortgage Association (Ginnie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and National Mortgage Association (Fannie Mae). Usually, the yields on agency bonds are higher than government bonds but lower than corporate bonds. Some agency bonds are free from state and local taxes. Like other bond funds, agency bond is sensitive to fluctuating interest rates. Their government affiliation agencies get favorable benefits such as the following: they are free from most state and local taxes, receive low-interest rates on borrowed money, and so on.
Asset-backed securities
Asset-backed securities is a bond backed by financial assets and issued by banks or other financial sector participants. It backs the securities as assets such as credit card debt, loan, lease, and so on. These types of bonds are not for individuals because they are typically reserved for institutional investors. Although these bond funds have some positive and some negative sides, bond funds are cost-effective ways than buying individual securities for some investors. Before investing in any bond fund, the investors must analyze the bond market as well as all the bond fund types carefully and select the best one suitable for their income.
