| o The IMF predicts the US economy to slow | | | | 5. They are more liquid than bonds. |
| down.o The outlook for Western Europe and | | | | Among these advantages, the last one is the |
| Japan isn't too great either.o Headline inflation has | | | | most important. It is the reason why one must |
| increased in both advanced as well as emerging | | | | buy bond mutual funds rather than individual |
| economies.o Oil price has doubled over the last six | | | | bonds. They can be easily bought and sold in |
| months.o There is a possibility of deeper | | | | smaller units. On the other hand, it is not so easy |
| economic downturn.o The stock markets of most | | | | to buy bonds and hold them. Bonds are not as |
| of the countries have tumbled during recent | | | | liquid as bond funds. Hence it is better to buy |
| times. | | | | bond mutual funds rather than bonds. |
| These sentences are not something new for | | | | TYPES OF BOND FUNDS |
| regular readers of newspapers, especially financial | | | | There are many different types. Of these, some |
| newspapers. Everybody would have been | | | | of the major ones are Government ones (or |
| affected as a result of the consequences of | | | | Federal bond funds), Municipal ones, corporate |
| these statements. During tough times such as | | | | ones etc. |
| these, where would you put your money? Stock | | | | Government Bond Funds |
| market - No that would be suicidal! Banks - rate | | | | They invest in debt securities issued by the |
| of return would be too low. Then where? | | | | government such as the Treasury bills, Treasury |
| One possible place is mutual funds. They are a lot | | | | bonds, Treasury notes, Mortgage-backed |
| safer than shares and earn better returns than | | | | securities issued by government agencies etc. |
| banks. But one must be careful while choosing a | | | | Some of them are also exempt from state and |
| mutual fund during recession times. It is always a | | | | or local taxes. |
| better bet to invest in bonds during recession. It | | | | Municipal Bond Funds |
| ensures regular interest payments and possible | | | | They invest in securities issued by state and/or |
| capital appreciation when bond price increases. | | | | local governments for doing public works such as |
| Bond mutual funds enable you to get just that. | | | | building bridges, laying of state highways, |
| As the name suggests, these funds invest in | | | | constructing schools etc. Some of them are also |
| bonds and debt securities. They aim to protect | | | | exempt from federal taxes. Since they have the |
| the invested capital and at the same time ensure | | | | backing of the federal government, they are |
| regular income from interest payments. Just like | | | | considered to have a very high credit rating. |
| any other mutual fund, they too have a Net | | | | Corporate Bond Funds |
| Asset Value (NAV) which is the value of each | | | | They invest in the debt securities of corporations. |
| share of the mutual fund. It is nothing but what | | | | They do not have the backing of the |
| one must pay to get one share of the fund or | | | | government; hence they are a bit more risky |
| what one gets when a share is sold. | | | | than the other two types. However they pay out |
| 5 reasons why one should invest in bond mutual | | | | much higher income than the government funds. |
| funds: | | | | Apart from these funds there are many other |
| 1. They are a lot less riskier than stocks | | | | types such as the "zero-coupon funds" - that |
| 2. They provide stability | | | | invest only in zero coupon bonds, "international |
| 3. They are diversified - the portfolio will be | | | | funds" - those that invest in international bonds, |
| across many different bonds thereby reducing | | | | "convertible securities funds" - which invest in |
| the risk of default and ensure regular payments. | | | | convertible securities (bonds that can be |
| 4. Some of them are exempt from federal and | | | | converted to stock) etc. |
| or state taxes | | | | |