Saturday, 24 October 2020

Dividend Mutual Funds and Bond Mutual Funds? Explained

What Are Dividend Mutual Funds?

While there is currently no mutual funds actually referred to as a “dividend mutual fund”, the term refers to a professionally managed mutual fund that pays dividends to its shareholders. These are funds comprised of a selection of different companies’ stocks, typically companies that are well established. 

As such, their growth may be relatively low or non-existent, so capital gains are essentially zero. As a result, the return on investment is not as high as with some other types of mutual funds, but the risk of loss is lower, m-fundaking them a good choice for retirement funds. However, there are few tax advantages in a mutual fund focused on corporate stocks.
Dividend Mutual Funds and Bond Mutual Funds? Explained

Dividends are payments made to the shareholders, out of the percentage of the corporation’s profits which has been set aside for dividend distribution. Dividend-focused mutual funds select shares of solid companies, and will usually diversify by owning shares in several corporations, some of which may even be competitors. Should the profits of one company decline, decreasing the dividends from that stock, the loss is usually covered by the dividends paid by the other stocks in the mutual’s portfolio. 

The goal in selecting the companies for the mutual’s portfolio is not to find companies that are growing, and will yield a high capital gain, but to invest in companies that are financially stable, with a significant share of an established market, to ensure ongoing profits, hence dividends.

What are Bond Mutual Funds? Types of Bond Funds

Bond funds are one of the more conservative professionally managed mutual funds around, in that they protect the invested principal and are invested in more stable debt vehicles, such as US government bonds, municipal bonds or corporate bonds.

The mutual members receive a monthly or quarterly dividend, comprised of the interest paid on the investment, plus any capital appreciation of the shares. Hence, there is a regular income derived, often with the added benefit of being tax-exempt.

US Government Bond Funds

These funds invest in debt securities issued by the US government. They include Treasury bills, Treasury notes, Treasury bonds, and also mortgage-backed securities, such as those issued by Fannie Mae and Freddie Mac. These are often exempt from state and local taxes, but not federal taxes. The greatest risks faced with these bonds are fluctuating interest rates and inflation.

Municipal Bond Funds

These funds invest in debt securities issued by state and local governments, to pay for specific projects, such as schools, highways, and bridges. They are exempt from federal taxes, and in some venues, state taxes, making them popular investment vehicles. Since municipalities have been known to declare bankruptcy, however, these bonds are riskier than US bonds.

Corporate Bond Funds

These are the least secure of the bonds group, as they are not backed by any government entity. To offset this higher risk, they usually pay a considerably higher yield than either US or municipal bonds. Should the corporation find itself in financial trouble, however, these higher-risk bonds can be rendered worthless.

There are several other types of bond funds, such as those that specialize in investing in zero-coupon bonds, international bonds, and convertible security bonds. There are also multisector bond funds that will spread their investments across several different types of bonds. Multisector bond funds are often selected for the higher risk portion of an investment portfolio, as the diversification protects the shareholder against downward spirals in one industry.

Investors usually choose mutual bond funds for two major reasons: regular income, and diversification. In some instances, as mentioned, tax exemptions make them even more attractive.

So-called dividend mutual funds can be a good low-risk investment vehicle, provided they are properly selected and that the mutual fund manager monitors them closely for any fluctuations. Minor ups and downs in one company or another are normal, but mutual funds must avoid these, or lose their preferred status.

Many factors enter into the selection of the companies in a good dividend mutual fund, such as company age, market share, profitability, flexibility, and other factors. The mutual fund itself should be selected by carefully investigating the past performance and risk profile.

Typically, a single quarter’s performance between two prominent mutual funds may differ by only one-eighth of a percent or less, so selecting the best long-term performer can make a great deal of difference in the outcome of your investment.

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