What Are Bond Funds and How Do They Work?
A bond fund is a mutual fund that invests exclusively in interest-bearing securities, such as government bonds, treasury bills, and corporate bonds.
Bond funds are suitable for investors seeking a long-term savings option with lower risk than the stock market, or as a stabilizing foundation in a diversified portfolio containing equity funds. They offer a chance for higher returns than a standard savings account, but with a correspondingly higher risk.
Saving in funds involves risk.
Different Types of Bond Funds
Which type of bond fund suits you best depends on your investment horizon and your willingness to take risk.
Short-Term Bond Funds
Short-term bond funds invest in securities with a maturity of less than one year. Because the risk of interest rate fluctuations increases with the maturity length, short-term bond funds carry low risk. They provide stable but relatively low returns, making them suitable for short-term savings.
Long-Term Bond Funds
Long-term bond funds invest in government securities with longer maturities, making them more sensitive to changes in market interest rates. The longer maturity means higher risk and volatility than short-term funds, but with higher expected returns. They are suitable for long-term savings.
Corporate Bond Funds
Corporate bond funds invest in debt issued by private companies rather than the government. Because companies carry a higher default risk than governments, corporate bonds have a higher risk profile than regular bond funds, though they are still generally lower risk than equity funds. They are suitable for investors seeking higher yields over a long-term horizon.
