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When it comes to investing, most investors focus on stocks but know little about bonds and bond funds. These alternatives to bond funds are attractive because they sometimes offer very high returns.
Some popular alternatives to bond funds are:
- Stocks
- Commodities
- Synthetic Derivatives
- ETFs
- REITs (Real Estate Investment Trusts)
Below, we show you how you can use bond funds to meet, or exceed, your investment goals.
The Best Bond Funds for Investment Income :
Bond funds are a tool that, in the hand of the sophisticated investor, can yield enormous profits. The typical investor, however, often does not know how to invest in bond funds properly and therefore loses his money outright. To invest profitably in bond funds, you must know how the money is made in this industry, and where the market is headed. This requires careful study and paying attention to the movement of fundamentals in the market, more so than just looking at prices. In addition, the careful investor looks at funds that have the best performance.
When it comes to investing for income or free cash flow, some bond funds stand out for more consistent income returns. These funds work well for people who need a reliable income stream from investments, such as retirees. A selection of such funds includes:
- Vanguard Limited-Term Tax-Exempt – This investment fund is tax exempt, and so will return more money to you that would have gone into paying taxes. It invests in BBB grade or better municipal bonds. As such, it is quite safe and conservative.
- DoubleLine Total Return N – This fund offers higher yield due to a mix of safe and riskier investments. This can result in you receiving a bit more investment income as you need the cash flow.
Highest Yielding Bond Funds :
The highest yielding bond funds are those that are perceived as the riskiest. Bond investing comes with some unique features based on the relationship between bond prices and interest rates. The interest rate determines the amount of money that the bond issuer will pay you, the investor, every year. Many bond issuers pay out the interest payment twice a year, that is, once every six months. The interest payment is also called the yield.
Selecting Corporate Bond Funds :
Corporate bond fund yields vary greatly depending on interest rates in the broader market as well as the risk profile of the underlying bond investments. A very safe fund that focuses on the most financially sound corporate bonds will yield less than a fund that takes more risk. It is important to realize that a higher yield corporate bond is also, on average, a riskier investment. If the company does not default on the bond, you make more money than with a safer investment. However if the company defaults, which happens more frequently than you might think, you not only lose interest payments, but your principal invested as well.
Vanguard Long Term Investment Grade Fund is one corporate bond fund with a good corporate bond yield. Its 3.75% yield is higher than some other corporate bond funds but still lower than a variety of riskier options.
PIMCO Investment Grade Corporate Bond Fund returns around 3.37%. It seeks to maximize total returns while preserving capital.
