Fixed Income Funds

Fixed income funds or bond funds are a type of mutual fund that invest in bonds and other fixed income investments. These funds are for more conservative traders.

What are Bonds

Bonds are the primary investment of fixed income funds. They are negotiable IOUs or debt securities, issued by a corporation, government or government agency.

When you buy a bond the bond issuer agrees to

1. Repay the fare market value of the bond at maturity date.

2. Make interest payments during the term.

This makes bonds a much safer choose then stocks over the long term.

Advantages and Disadvantages to Going this Route

Investing into bonds in order to get a fixed income has its advantages and disadvantages. The main advantage is that they offer their investors a much safer return then you will be able to find in the stock market.

When you invest into bonds which are backed by the government or large corporations there is not a lot of risk that you will not end up seeing your money again. This is not true when you look at stocks.

The other advantage of bonds is that they pay you a regular income. If you have enough money to invest this can potentially be enough to pay your bills.

However there are disadvantages to bonds as well. For starters they tend to not perform as well as stocks over the long term.

While they are safer they are mainly meant for the income that they produce and do not offer a lot of growth potential.The other disadvantage when it comes to bonds is that they are not full proof investments. The biggest misconception about bond funds is that they carry no risk. They do in fact carry risk in 3 ways.

1. Credit Risk. The bonds owned by a fund my default, as in not pay it back. This risk is lowered if the bond issuer is a government agency or a major company, but you never what will happen with absolute certainty.

2. Prepayment Risk. The bond issuer may pay the bond back in advanced when interest rates have declined, which could lower returns.

3. Bonds go up and down. It still is possible to sell a bond for less then you bought it if the price falls, however, if you are investing into a fixed income fund for some cash flow that is rarely ever an issue.