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What Are Bonds?

A bond fund also known as an income fund puts your money into a pool with other investors. The objective is to generate an income stream for investors by investing in fixed income securities like government securities or gsecs/gilts, bonds, debentures, fixed deposits and the like. Bond funds are launched by unit-linked insurance plans (ULIPs), mutual funds and other investment firms.

Bond funds come in various avatars and typically fall in one of these categories - bond funds investing in:

1. short-term investments - suitable for investors with an investment horizon of less than a year
2. medium to long-term investments ideal for investors with an investment horizon of at least three years
3. government securities or gilts also known as gsec funds
4. bonds and gsecs having long-term and short-term maturities to make the most of market opportunities also known as dynamic bond funds

How Does a Bond Fund Work?

Given the nature of the insurance investor, expectedly, bond fund are run conservatively. The fund manager invests in fixed income securities with higher credit ratings and established financials. This lowers considerably the default risk in repayment of capital and interest.

The objective of the bond fund is to maximize income. This is achieved in two ways:

1. capital appreciation, which is when the bond fund NAV or net asset value rises over a period of time
2. dividend payout at periodic intervals depending on surplus fund

Who Is It Suitable For?

For an investor, income funds either on a standalone basis or in a portfolio are ideal for planning for a child's education, setting aside money towards down payment on a house, retirement planning, among other long-term goals.

Even investors with higher risk appetites who prefer to invest through equity funds / equities, can consider investing a portion of money in bond funds for diversification.

Highlights of Bond Funds

1. bondholders receive regular dividends.

2. bonds are an excellent option for those looking to accumulate a significant sum over a long time.

3. Investors of bonds receive a part of the investment if they cash-in early.

4. Bonds payout on the death of the insured person. The insured person, in this case, may or may not be the same as the person who purchased the bond.

Conclusion

Bonds are a safe investment but if you wish to tap multiple investment opportunities with a balanced risk then you can put your money in ULIP (Unit Linked Insurance Plan). Eventually, whether you choose bonds or combined investment plans depends on your investment goals.

You may also like: 5 Regulatory Moves Taken By IRDAI That Have Improved The Life Insurance Sector

Tips To Choose The Right Term Plan

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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