Guide to Selecting Top Bond Investment Funds in 2018

If you're considering growing your savings through market investments, bond funds are a smart choice. They offer a steady income stream and diversification, making them popular among investors seeking stability. A bond is essentially a loan you give to an issuer for a fixed period, earning interest in return. When you invest in bond funds, you're pooling your money with others into mutual funds that invest in various bonds, providing broader exposure.

Understanding how bond funds operate is key. Unlike stocks, where you own a share of a company, bonds are a form of lending that pays interest. The bond fund aggregates these interests, distributing payments to investors over time. For example, investing $5,000 in a bond fund with a 10-year maturity and a 5% interest rate yields $250 annually plus the principal at maturity.

Bond funds differ from stocks mainly because they involve lending rather than owning a share of a company. They pay interest regularly and return the initial investment at maturity. Diversification is a major advantage of bond funds, offering protection even if stock markets falter. Selecting bond funds that provide maximum diversification can help balance your portfolio.

Tax-efficient accounts such as 401(k)s or IRAs are ideal for investing in bond funds, as they typically allow your earnings to grow tax-deferred. Additionally, municipal bond funds are tax-exempt at federal levels and, if aligned with your state, may also be exempt from state taxes, increasing returns.

It's crucial to define your investment goals. For short-term needs, short-duration bond funds are preferable, while longer-term funds suit those with a longer investment horizon. Consulting financial advisors or investment professionals can help optimize your choices and maximize returns from bond funds in 2018.