What is a bond mutual fund? What is it like? How risky is it? Is it suitable for working people like us? In this article, we will find out what it is like.
Some people recommend investing in other ways besides deposits because the interest rates are too low. There are many investment options, whether it’s direct investment in securities such as stocks, bonds, and indirect investment, or investors pooling their investments and entrusting them to professionals or experts, namely fund management companies (AMCs) with fund managers to manage the money, which is…
Investing through mutual funds >> There are many types of mutual funds, such as money market mutual funds, debt instruments, equity instruments, mixed funds, etc.
If you really want to invest, please be patient. If you still don’t understand or know what you are interested in investing in, it would be better to delay your decision a bit to find more information before making a decision.
Today I will introduce you to a mutual fund called a bond mutual fund.
What is a bond mutual fund ?
Debt Mutual Funds are “mutual funds” that focus on investing in “debt instruments” (the previous article defined debt instruments).
Bond funds focus on investing in debt instruments such as corporate bonds and government bonds, whose profits depend on the interest rate of the debt instruments, and these profits are reflected in the fund’s NAV (some bond funds may have a dividend payment policy).
If mutual funds invest in corporate bonds, they will receive higher interest than government bonds because the risk of private issuers is higher than government bonds, “high risk, high return”.
How many types of bond mutual funds are there?
There are many types of bond funds, depending on the risk objectives, return rates, and investment period. However, bond funds are generally divided into two main types of investment, such as:
Invest in government debt instruments such as government bonds, state enterprise bonds, Bank of Thailand bonds, treasury bills.
Or invest in private debt instruments such as bonds, etc.
What is the lifespan of bond mutual funds?
Debt mutual funds are divided into two types according to their age as follows:
- Short-term fixed income fund is a mutual fund with an investment policy in deposits or debt instruments with an average maturity of no more than 1 year. This type of mutual fund is suitable for investors who want to invest in the short term and want low risk.
- Long-term fixed income fund is a mutual fund with an investment policy in deposits or debt instruments with an average maturity of more than 1 year. This type of mutual fund is suitable for investors who accept low risk but can invest in the long term.
Are bond mutual funds really low risk?
Bond funds are low risk, partly due to investment in debt instruments where investors are in the position of creditors and receive a steady return in the form of interest.
However, credit rating can change because as time goes by, it is possible that there is no investment without risk. It depends on which one is more risky or less risky. But what is certain is that if you want to invest, but do not study and seek knowledge and information, it is definitely very risky.
Investing in bond funds is an indirect investment that requires consideration of the risks of the bonds in which the fund invests, such as the risk of default. Because if the bonds in which the fund invests have problems, it will affect the returns or value of that fund.
But investing in debt instruments through mutual funds also has an advantage, which is that it helps reduce the problem of liquidity risk because trading in debt funds can be done immediately, taking 2 business days from the date of buying and selling securities (all funds can really be sold within 2 business days? I thought it depended on the fund’s specifications, or is it because the fund manager must select items with sufficient liquidity, so they can guarantee the sale back?)
However, trading in debt instruments directly will depend on the demand for debt instruments at that time (there may be a risk of not being able to sell or not being able to do so at the desired time/price).
And when investing through mutual funds, it is inevitable that the buyer will have to pay fees, such as fund management fees, which are different from direct investment.
Another issue that many people are interested in is the tax on debt instrument mutual funds.
The collection started this year, since August 20, 2019. The main objective is to create equality with direct investment in debt instruments, where 15% of the interest received by investors is withheld at source (previously, no tax was collected from investment in debt instruments).
How will this affect investors in bond mutual funds?
The answer is indirect impact.
This 15% withholding tax is deducted from “debt mutual funds” and will be deducted when interest is received.
When the fund is taxed > the fund income decreases > the value of the mutual fund decreases (NAV decreases). In direct investment, the bond buyer must also be subject to a 15% withholding tax.
In summary, investing in bond funds is an investment option that is suitable for investors who expect higher returns than deposits and accept returns that may be lower than stocks. This type of mutual fund is suitable for investors who accept low to medium risk, depending on the type of bond the fund invests in.
Don’t forget that before investing every time, read the prospectus in detail, study the conditions well before deciding to invest. Study carefully what type of debt instruments the bond fund invests in, what is the reliability or credit rating of the fund, or you can visit the SEC website> www.sec.or.th to find more information as well
For other articles about bonds , you can read more at:
Bonds are not a loan for investment. So what exactly are bonds and who are they suitable for?
