What are bonds?

Bonds are debt issued by corporations or state and local governments. The buyer of a bond is paid interest on that debt as well as return of principal on the bond’s maturity date. Bonds are sometimes referred to as “fixed-income” investments because every year they should deliver a predefined interest payment, in the form of dividends, with minimal risk as compared to equities.

What are bond funds?

Bond funds are mutual funds that invest primarily in bonds. There are many categories of bond funds, including those that invest across multiple types of bonds, as well as specialized funds that focus only on certain sectors of the bond market.

Why invest in bond funds?

Bond funds can be a great way to balance out a portfolio that may be heavy in more aggressive investments, like international stock funds. Because the equity and bond markets do not move in lockstep with each other, bond funds have the potential to decrease overall portfolio volatility. Also, the income generated from some bonds can be exempt from federal and state income taxes.

Investor Profile

• Looking for steady growth potential.
• Low tolerance for risk or looking to diversify with a more conservative investment.
• Wants to generate income or preserve capital.

In general, the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.