Are Bond Mutual Funds a Safer Bet?

Investing is a risky process. When you invest, you have to keep the degree of risk you are taking on in the back of your mind. More risk means an increased possibility that you will lose money. If you invest high risk, there’s a good possibility you’ll lose money whereas if you invest in a low risk investment, you will be less likely to lose money. Your goal should be to make as money money as you can with as little risk as possible.

Different types of investments carry varying degrees of risk. Let’s say you have $10,000 that you want to loan for investing and you have 2 friends that need money to start a new business. The first friend has borrowed and repaid money to you many times before. You have trust with them that they will pay you back.

The other friend has borrowed money from you before and didn’t always pay you back. Sometimes it was just $20 they borrowed for lunch, but somehow they just conveniently forgot about it. They want to borrow the money for their new business that they feel confident about, and they swear they will pay you back. Unfortunately, they have failed in past businesses and didn’t pay back the money they borrowed.

The second friend is very risky, but to you, their business idea sounds incredible. You could see it making a lot of money and you’re friend promises that you can share half of the profits. On the other hand, your first friend has a pretty ordinary idea and they promise they’ll pay you back with 8% interest.

You have a lot more risk in the second friend, but you will make a lot more money with them. You have almost no risk with the first friend, but you’re only going to make 8%, no matter how well the business does. You have to decide if you are willing to take the risk on more profit.

The same goes with stocks and bonds. Stocks are more risky, but you could earn a lot more. Bonds are less likely to earn more money, but you’ll at least get back what you put in. The same goes with stock and bond mutual funds.

If you are going to retire soon or if you have already retired, you should focus more of your funds into bond mutual funds. These carry less risk which ensures you will have the money you need once you reach retirement. You don’t want to take too many risks with the money you need to live on.

While your young, invest more in stocks. As you get older you can invest more and more in conservative bonds. This method will allow you to make the most without worrying about losing it.

Tagged with: Bond Mutual Funds • Mutual Funds

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