Advantages of Bond Funds

Low Minimum Investments
Buying bonds through a licensed broker usually requires a minimum of $5,000 to $25,000. Investing with a broker also may involve sales charges and commissions. Bond funds, on the other hand, often set minimum investments of $2,500 and may include a portfolio of many individual bonds.

Bond funds enable you to invest in a more diversified portfolio of bonds than you otherwise might be able to afford. To invest in 100 individual bonds through a broker, for example, you might need as much as $500,000.

Bond funds also may reduce your overall investment risk. Diversification among stocks and bonds can help smooth out volatility and produce a more balanced portfolio. That's because stocks and bonds often respond differently to changes in the economy, though diversification alone cannot ensure against loss.

Professional Management
Professional money managers select investments and monitor bond fund portfolios.

Convenience and Accessibility
When you want money from a bond fund, you simply sell enough shares to equal the amount you need (taxes will be due on any gain you realize). The sale of individual bonds requires finding a buyer on the open market.

A Word About Income

Bond funds may appeal to you if you want steady income, perhaps to supplement other retirement assets. But you'll need to balance your desire for income with your tolerance for risk, since funds that offer the highest yields typically involve more risk.

For the highest potential income, consider corporate high-yield bond funds or long-term bond funds. If you want to balance risk and reward, you might consider funds that invest in securities based on pools of mortgages. These can include Ginnie Mae funds, which guarantee timely payment of principal and interest. Remember, mutual fund shares are not guaranteed.

However, not all bond funds pay current income. Zero-coupon bond funds don't make regular interest payments. Instead, the fund's shares rise in value until a specified maturity date, when principal and accumulated interest is returned in a single payment. Some investors prefer these funds for goals they hope to reach on a certain date, such as paying college costs, because they know in advance approximately how much these investments will be worth when they mature. Returns on these funds are not guaranteed, however.

Like Any Mutual Fund

Bond funds (aside from zero-coupon funds) generally have no maturity date. Instead, fund managers purchase many different bonds with varying maturities. So there is no assurance you'll get your principal back at a predetermined date. Bond funds generally own a changing portfolio of bonds, so the interest rate paid to investors and the share price of the funds fluctuate with market conditions. Generally, as interest rates rise, bond prices will fall.

If you are seeking to diversify, reduce risk or increase your income, you may want to consider how bonds or bond funds fit your investment plans.

This information is for educational purposes only and is not intended as investment advice.