Bond funds are essentially a basket of funds finance bound. What totally differentiates them from solo bonds is that they are not a sole bond rather a basket of bonds having different tenure.

Hence a bond fund is similar to a financial gain fund that invests cash into a pool with other investors.

The prime objective behind the bond fund is to get associate financial gain stream by finance in mounted fixed income securities like government bonds, debentures, T-bills, fixed deposits, etc.

Bond funds come in different time horizons ranging from short-term to long-term tenure.

Short-term investments typically have a tenure of less than a year Medium to long-term investments are typically meant for tenure with a time horizon of at least 3 years.

Debt securities having a short-term and long-term maturity are also called dynamic bond funds

The core objective behind the bond fund or any other investment is to maximize income. Therefore, a fund manager invests in fixed income securities having investment-grade ratings and well-established financials. This is best suitable for the risk-averse investor in such a way that the default risk lowers in repayment of capital and interest.

Bond funds benefit investors from many perspectives:

Bond funds provide investors with diversified portfolios as these funds consist of a pool of different funds having varying maturities. In this case, if the issuer defaults to pay periodic interest or principal amount on a single bond out of the pool of bonds the impact gets lessened as it has other bonds to cover it up.

Bond funds save the transaction costs associated in the form of fees for individual bonds

In most cases, the income generated from the bond funds in terms of periodic interest payments is exempted from income taxes.

The exposure to the imbalances in the economic and market conditions can be prevented under the bond funds portfolio and helps to stabilize the risk and return potential.

Having bonds with short-term and long-term maturities in the portfolio helps to reduce the exposure to price volatility as short-term maturity tends to have less exposure to market risk fluctuations as compared to long-term bonds.

Although the bond funds have not been as volatile as stocks they are associated with certain risks. Understanding the possible risks provides support to the portfolio which helps the investments to align with the risk tolerance.

Risks associated with bond funds:

1. Interest rate risk- The price and yield of a bond often share an inverse relationship. When the interest rate rises in the market the price of the existing bond held by an investor declines. This means higher interest rates mean lower yield bonds are less attractive.

2. Credit risk- Investing in a bond means providing a loan to someone and in return get periodic interest and in the end the entire principal amount. The greatest risk comes in regards to the issuer defaulting to make an interest payment and ultimately the loan amount at maturity. However, throughout the tenure of the bond there arise situations wherein the price of the bonds held by a fund might drop that may bring a decrease in the value of the investors holding. But such ups and downs are common in regards to any investment asset class.

3. Prepayment risk- The risk associated if the issuer pays off the bond before its maturity. Such a scenario occurs if the prevailing interest rate dips and the bond issuer may decide to retire its bond and issue new bonds which provide a lower rate. Hence the funds find it difficult to reinvest the proceeds in an investment with as high a return as the existing one.

Thus any investments are subject to certain risks which should be studied carefully before investing. Bondskart has a team of experts who can provide an in-depth understanding of the risks associated with different asset classes and the ways to hedge the risk associated with different asset classes