For mutual fund investors, taxes are inevitable. Even if you’re a long-term buy...
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Bond funds are attractive because they can be tied to retirement accounts and can be used to hedge against market uncertainty. Since most portfolios have exposure to stocks, government and corporate bonds provide more stable investment vehicles. Although they often return less than equities, they provide “guaranteed” interest payments while preserving your capital until the maturity date. It’s also not uncommon for a bond’s interest payments to be higher than the dividend payouts of leading companies.
However, it is interesting to note that bond funds can be divided along several dimensions, including credit quality, maturity profile, dividend yield, geographic location, and the type of issuer. Let us see the different types of bonds in details.
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Debt instruments that fall under the investment grade bucket can include government bond funds like U.S. Treasuries, inflation-protected funds like Treasury Inflation-Protected Securities, mortgage-backed funds like those issued by Fannie Mae or a major bank, and corporate bond funds. Investment-grade bond funds have primary exposure to these types of assets. Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX) and Vanguard Short Term Inflation-Protected Securities Index Fund (VTIPX) are good examples of investment-grade bond funds.
It’s important to note that fund managers rarely hold bonds until maturity due to market conditions. For example, it’s not necessary to hold a bond fund with exposure to 10-year U.S. Treasuries for the full ten years. The fund can be sold long before the maturity date, provided there’s a buyer.
Click here to learn about the characteristics of bond funds.
Examples of international bond funds include the the Vanguard Total International Bond Index Fund (VTIBX).
Don’t forget to check out all funds from Vanguard here.