Investing in bonds requires much of the same research as CDs that mature on differing dates, which is why bond funds are chosen by many investors. Many bond funds have a myriad of benefits, including low risk and high yield. These guidelines explain which are the highest yielding bond funds.
Bond Funds Explained
Individual investors find the management of bond portfolios a time-consuming venture. However, they’re an effective way of gaining exposure in the bond market, or for focusing on certain bond types. When you begin investing in bond funds, you’ll find that they work similarly to mutual funds in the stock market. What this means is that the assets are bought by the fund in the bond, allowing the investor to purchase shares within that bond. In most circumstances, the bonds are not held until they reach maturity. Instead, the most common method is to re-balance a portfolio by buying and selling bonds in the bond fund.
Types of Bonds With High Rates of Return
Those investors in high tax brackets may find top-rated municipal bond funds attractive, but there is a degree of risk with their securities. There are general obligation bonds, which are those that receive backing from the issuing entity’s taxing power. Many consider these a safer investment than revenue bonds. However, because general obligation bonds have less risk, they’re also subject to lower interest payments. Over time, revenue bonds hold a higher risk for defaulting, but can provide investors high rates of return. When investors choose municipal bond funds, it allows them to diversify with both revenue and general obligation bonds, creating an ideal portfolio for income that is tax-exempt.
The Advantages of Bond Funds
It’s possible for dividend payments from bond funds to be automatically reinvested. In this way, you can save the time of having to research new bonds for investment. Plus, the automatic reinvestment helps your future returns grow. There may also be opportunities for bond funds to benefit from better pricing when acquiring bonds. It’s possible for bond investors to have their pick of options for the best total bond funds, ranging from low-risk bonds to high-yield municipal bond funds, specialized funds, market index funds and a myriad of options through ETFs and mutual fund companies.
Bond Fund Disadvantages
There are some drawbacks to investing in bond funds, and one of the most significant is the cost. When you participate in bond funds, the fees can take a considerable amount of your return. Some of the costs include transaction-based and management fees. Another drawback is the risks associated with bond funds. While they fluctuate because investors continuously buy and sell, as they age and reach maturity, risks will have a downward trend.
How to find High Rates of Return
When looking for the top bond funds with the highest rates of return, you have to weigh your fees and expenses. You also need to focus on corporate bond fund yields that are high yield and offer short maturity durations of less than five years. US treasury bond funds provide capital preservation and low risk, but have only a slightly higher interest rate than traditional savings accounts.