Keep Your Balance with Bond Funds
December 23, 2003
Holding a mix of stocks and bonds in a portfolio is a little like including vegetables and protein in a meal – you can have one or the other, but you may be better off with both.
Adding bond investments to a portfolio may help manage overall portfolio risk over time. But before assessing your fixed-income needs, you’ll need to know some bond basics.
A bond is essentially an IOU from the bond’s issuer (a corporation or government body) to the investor. In return for the use of the investor’s money, the issuer agrees to pay interest at a stated rate, known as the coupon rate, and to repay the principle when the bond “matures.” Because the interest payments represent a steady stream of income to the investor, bonds are often called “fixed-income investments.”
Keep in mind, however, that not all bond investors hold on to their bonds for the full term. Instead, they may resell them to other investors for more or less than they originally paid, depending on whether newer, comparable bonds are paying lower or higher rates of interest.
Many individual investors look to bond funds to help meet their fixed-income needs. Bond mutual fund benefits include diversification (a fund manager may invest in hundreds of bonds) and professional management, which can save you the hassle of having to research and evaluate the thousands of individual bonds on the market.
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Bond funds come in a variety of forma, each striving to serve a different purpose based on the underlying individual securities. For instance, U.S. government bond funds are composed of securities backed by the full faith and credit of the U.S. government and are generally considered the least risky bond funds.
Corporate bond funds invest in riskier high-yield, investment grade, corporate issues. In general they are riskier than U.S. government bond funds, but may offer higher yield potential.
Municipal bond funds invest in issues of state governments and municipalities that may produce income that is free from federal and, in some cases, state and local taxes.* Because of their potential benefits when compared with taxable securities, municipal bond funds may be appropriate for higher income investors.
Keeping a variety of bonds as part of a well-diversified portfolio may help you better manage any unexpected market shifts. Work with your financial professional to determine your fixed-income needs, identify bonds of bond funds that may help meet them, and evaluate the associated risks.
Jeffrey Apps and Tracy Tutag are investment advisor representatives with AXA Advisors LLC (member NASD, SIPC) in Edwards. They can be reached at 926-0601 or firstname.lastname@example.org