Understanding Bond Funds – part 2
Filed Under (Unit Trust) by Webmaster on 11-04-2009
Tagged Under : bond funds, diversification, liquidity, maturity date, regular income, reinvestment
This is part II of Understanding Bond Funds. You can view part I of understanding bond funds to find out what type of bond available.
What are bond funds?
Bond funds are portfolios which “pool” money from different investors to invest in bond instruments. These funds are established and managed by fund management companies. They invest mainly in government bonds as well as corporate bonds, depending on an established investment guideline.
It would be difficult fot individual investors to access the bond market directly as there is a need for minimum standard trading lots. In Malaysia, this standard trading lot is RM5 million. By “pooling” money from a wide spectrum of investors, bond funds provide avenues for individual investors to invest in such instruments, in smaller amounts.
Why invest in bond funds?
Some of the key advantages of investing in bond funds are:
1. Professionally managed
Bond funds are managed by professional fund managers who are well-trained and have a proven track record in analysing the interest rate outlook and creditworthiness of bonds. Large bond fund managers usually have in-house economics and credit teams to assess macro outlook and credit standings of the various bonds in the market.
2. No fixed maturity date
While individual bonds have fixed maturity dates, open-ended bond funds do not have fixed maturity dates as fund managers constantly rebalance the portfolios. Therefore investorts need not worry about re-investing their money.
3. Regular income
Most bond funds offer investors regular income distributions derived from the coupon income generated by the underlying bonds in the portfolio. Thus, bond funds give investors a stable, regular income.
4. Automatic income reinvestment
Investors who are not in need of regular income could opt for automatic income reinvestment. This option allows income distribution from the bond funds to be reinvested automatically in the fund which gives the investor more units.
5. Liquidity
Investors are free to redeem units of a bond fund at the current net asset value (NAV) of fund. Bond funds provide liquidity and convenience as investors could buy or sell their units every day. Investors could redeem their units without having to wait for each bond to mature.
6. Diversification
Bond funds provide diversification to investors as they invest in wide spectrum of bonds. This reduces the risk of over-exposure to any single bond.
We at Pro Trade Shares hope the last two articles on bond fund were beneficial.
