What is a Bond Fund?
A bond fund also known as an income fund puts your money into a pool with other investors. The objective is to generate an income stream for investors by investing in fixed income securities like government securities or gsecs/gilts, bonds, debentures, fixed deposits and the like. Bond funds are launched by unit-linked insurance plans (ULIPs), mutual funds and other investment firms.
Bond funds come in various avatars and typically fall in one of these categories - bond funds investing in:
- short-term investments - suitable for investors with an investment horizon of less than a year
- medium to long-term investments ideal for investors with an investment horizon of at least three years
- government securities or gilts also known as gsec funds
- bonds and gsecs having long-term and short-term maturities to make the most of market opportunities also known as dynamic bond funds
How Does a Bond Fund Work?
Given the nature of the insurance investor, expectedly, bond fund are run conservatively. The fund manager invests in fixed income securities with higher credit ratings and established financials. This lowers considerably the default risk in repayment of capital and interest.
The objective of the bond fund is to maximize income. This is achieved in two ways:
- capital appreciation, which is when the bond fund NAV or net asset value rises over a period of time
- dividend payout at periodic intervals depending on surplus fund
Who Is It Suitable For?
For an investor, income funds either on a standalone basis or in a portfolio are ideal for planning for child’s education, setting aside money towards down payment on a house, retirement planning, among other long-term goals.
Even investors with higher risk appetites who prefer to invest through equity funds / equities, can consider investing a portion of money in bond funds for diversification.
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