The 4 Types of Bond Funds

Bond funds are a type of mutual fund that invests in bonds as the underlying investment for the portfolio. Bonds are a debt instrument that can be issued by a business or a government. Bond issuers provide regular interest payments to the purchasers of the bonds. Bond funds pool the money of investors together in order to purchase many different bonds on behalf of the group. The money from the interest payments is then collected by the fund and distributed to the investors of the fund. Here are some of the different types of bond funds that are available. 

1. Corporate Bond Funds

Corporate bond funds invest in bonds that are issued by companies. Many corporations regularly issue bonds as a way to raise money. Corporate bond funds can sometimes provide very competitive interest rates to investors. With this type of bond fund, you will be able to invest in some of the biggest companies in the world. Even though you are investing in individual companies, this type of bond fund is still relatively safe. Since bonds are considered to be a debt instrument, if a company goes out of business, it will have to repay bondholders out of the assets of the company. In addition, the bond fund will hold thousands of different bonds and will provide diversification to the investor.

2. Government Bond Fund

Another option that you have is the government bonds fund. This type of bond fund only invest in government bonds as the underlying security of the fund. This type of fund will typically invest in Treasury bills. In addition to Treasury bills, the fund may also buy savings bonds as well. This type of bond fund is generally considered to be one of the safest types of funds that is available. Most investors feel comfortable when investing their money into the federal government.

3. Municipal Bond Funds

Municipal bond funds are another option that is very attractive to certain individuals. This is a type of bond fund that invests in municipal bonds which are issued by municipalities, such as local school systems, city and state governments. The major draw of investing in these funds is that the profits that are received from the interest payments are tax-free for the investor. With this type of investment, the returns will generally be smaller than what you could get from a traditional bond fund. However, by the time you calculate your after-tax profit, you may find you earned more money with these bonds. Investing in municipal bonds is also extremely safe because you are essentially investing in municipalities that have a low likelihood of going into default.

4. High-Yield Bond Funds

High-yield bond funds attempt to provide the highest returns available from a bond fund. These types of funds are also referred to as junk bond funds. Junk bonds are bonds that are rated as high credit risks according to bond rating agencies. These companies have to pay higher amounts of interest in order to attract investors even if they are a little riskier to invest in.