Well, the pros of bond funds are the same as for stock funds. Namely, you get professional research and management, and you get lots of diversification for your dollar. You can also reinvest bond payouts automatically - something you can't do with individual bonds. Lastly, it's easier to sell shares of bond funds than individual bonds.
The biggest drawback to bond funds is that they don't have a fixed maturity, so neither your principal nor your income is as certain as it would be with individual bonds. Fund managers are constantly buying and selling bonds in their portfolios. That means your interest payments will vary, as will the fund's share price.
Technically known as an "open-end company," a mutual fund is an investment company that pools money from many investors and invests it based on specific investment goals. The mutual fund raises money by selling its own shares to investors. The money is used to purchase a portfolio of stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. Each share represents an ownership slice of the fund and gives the investor a proportional right, based on the number of shares he or she owns, to income and capital gains that the fund generates from its investments.
The particular investments a fund makes are determined by its objectives and, in the case of an actively managed fund, by the investment style and skill of the fund's professional manager or managers. The holdings of the mutual fund are known as its underlying investments, and the performance of those investments, minus fund fees, determine the fund's investment return
While there are literally thousands of individual mutual funds, there are only a handful of major fund categories:
- Stock funds invest in stocks
- Bond funds invest in bonds
- Balanced funds invest in a combination of stocks and bonds
- Money market funds invest in very short-term investments and are sometimes described as cash equivalents
Most fund companies also offer one or more money market funds, which make very short-term investments and are sometimes described as cash equivalents.
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