Where to invest? Government Bond Funds VS Short-term corporate bond funds
Government Bond Funds
Government bond funds are mutual funds or ETFs that invest in debt securities issued by the U.S. government and its agencies.
The funds invest in debt instruments such as T-bills, T-notes, T-bonds and mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac. These government bond funds are great for low-risk investors.
These funds can also be a good choice for first-time investors and investors looking for cash flow.
Risk: Funds that invest in government debt instruments are considered one of the safest investments because the bonds are backed by the full faith and credit of the U.S. government.
However, the fund itself, like other mutual funds, is not backed by the government and is subject to risks such as interest rate fluctuations and inflation. If inflation increases, purchasing power may decrease. If interest rates rise, the prices of existing bonds fall; and if interest rates fall, the prices of existing bonds rise. Interest rate risk is greater for long-term bonds.
Liquidity: Shares in bond funds are highly liquid, but their value fluctuates depending on the interest rate environment.
Short-term corporate bond funds
Companies sometimes raise money by issuing bonds to investors, and these can be packaged in bond funds that hold bonds issued by possibly hundreds of companies. Short-term bonds have an average maturity of one to five years, making them less sensitive to interest rate fluctuations than medium- or long-term bonds.
Corporate bond funds can be an excellent choice for investors who are looking for cash flow, such as retirees, or investors who want to reduce overall portfolio risk but still earn returns.
Risk: As is the case with other bond funds, short-term corporate bond funds are not FDIC-insured. Investment grade short-term bond funds often reward investors with higher returns than state and municipal bond funds.
But the greater rewards come with additional risk. There is always a chance that companies' credit ratings will be downgraded or that they will run into financial trouble and be unable to repay their bonds. To mitigate that risk, make sure your fund consists of high-quality corporate bonds.
Liquidity: You can buy or sell the shares of your fund every business day. In addition, you can usually reinvest income dividends or make additional investments at any time. Just keep in mind that capital losses are a possibility.
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