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The Curious Bag
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Diversification is an investment strategy that combines a variety of investments, such as stocks, bonds and money-market funds, to reduce the risk and volatility of a portfolio. Bond funds are considered one of the safest investment vehicles.
Strategy
Bond funds invest primarily in bonds or other debt securities. Bond funds tend to pay higher dividends than savings accounts and money-market funds.
What is a Bond?
A bond is similar to an IOU. When an investor purchases a bond from a bond issuer, he or she essentially is lending money to the issuer. The issuer promises to pay the investor a specified rate of interest for the life of the bond, and to pay the face value of the bond plus interest when it comes due.
Investing in Bond Funds
Investors tend to invest in bond funds to diversify their portfolios, or to have a predictable stream of income from the bond interest.
Types of Funds
There are three basic types of bond funds: government bonds, which are sold by the U.S. government; municipal bonds, which are tax-exempt bonds issued by states, cities and counties to raise money for public works (such as low-income housing or other construction projects); and corporate bonds.
Warning
Bond funds, like other investment funds, are not without risks, so consult a financial adviser to help plan your portfolio for best results.
Source:
U.S. Securities and Exchange Commission
Resource:
Investopedia
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