Introduction
Funds that specialise in intermediate-term bonds often hold bonds with maturities between five and ten years. Mutual funds are investment vehicles that aggregate capital from many investors and invest it according to a predetermined investment strategy or objective. Investing in bond funds is simpler than buying individual bonds since the fund managers do the legwork. It's also common for there to be less of a minimum investment amount.
If you invest in a bond fund, your money is spread out among several different bonds, including government bonds, corporate investment-grade bonds, corporate high-yield bonds, and municipal bonds, reducing the likelihood of any bond default wiping out your entire portfolio. The same holds for intermediate-term bond funds, which offer diversification within the bond fund category.
How Intermediate-Term Bond Funds Work
Bonds can be issued for periods ranging from less than a year up to several decades, with maturity dates corresponding to the time at which the bond issuer repays the principal or face value of the bond. Investing in bonds requires careful consideration of many factors, including the investor's long-term financial goals and the duration during which the bond will provide a return. Typically, we use the following criteria to define ranges:
- Temporary: From Six Months to Five Years
- Intermediate: five-to-ten-year
- Long-term: Ten years or longer
The interest rate risk associated with short-term bonds is lower than long-term bonds, but their low returns have made them a popular alternative to money market funds. Bond prices fall when interest rates rise because investors can earn a higher rate of return by purchasing a new bond. Maintaining a position in the intermediate term can be optimal during periods of interest rate volatility.
This is because you will incur less interest rate risk than a long-term bond while still receiving a higher yield than a short-term bond. When picking a mutual fund, fees are extremely important. The typical expense percentage for a domestic bond fund is 0.42%. However, you could discover a bond index fund with a lower expense ratio. Find a no-load fund, as that is the most crucial thing to do. Loads are additional charges or expenses that may be incurred either at the time of purchase or redemption of a bond.
Advantages Of Intermediate-Term Bond Mutual Funds
Less work for the investor
Investing in an intermediate-term bond fund can spare you a lot of time and effort otherwise spent on specific companies' financial stability and potential return on investment. Research into the bond fund itself, rather than the firms held inside it, are required before making a bond fund investment.
Automatic diversification
Diversification is crucial, not just across different investment categories but also between different asset types. You can instantly reduce exposure to any company or bond risk by purchasing intermediate-term bond funds.
Disadvantages of Funds of Intermediate-Term Bonds
Lower returns compared to stocks
Even while bonds are often considered a safer investment than stocks, the returns on bonds are substantially smaller. Bonds may not provide sufficient yields to suit the needs of younger investors who are more concerned with portfolio growth than capital preservation.
Inflation risk
When the dollar loses its purchasing power, inflation occurs. Low-yield bonds carry the risk of having an interest rate that falls short of keeping up with inflation. Buying power is diminished if inflation rises by 2% while you earn only 1% on your bond.
Intermediate-Term Bonds and Yield
Shelve-registered medium-term debt securities allow the issuer to change the bond's maturity date or nominal rate to meet the issuer's needs or the market's demands at any time during the instrument's life. Medium-term notes, much like long-term bonds, are issued as coupon-paying instruments and must be registered with the SEC. In the financial markets, the yield on a 10-year
Treasury is a crucial indicator since it is a standard against which other interest rates, such as mortgage rates, can be compared. The auction price of the 10-year Treasury note reflects investors' perception of consumer confidence in economic expansion. When deciding whether or not to adjust the fed funds rate, the Federal Reserve looks at the yield on 10-year Treasury bonds. Loan rates between 10 and 15 years increase in tandem with yields on 10-year Treasury notes, and vice versa. Treasury yield curve analysis can also be used to determine the stage of the business cycle an economy is in.
Conclusion
Debt with two to ten years of maturity is considered medium-term (or intermediate) debt. Because maturity date is the primary factor in yield calculations, it is commonly used to categorise bonds and other fixed-income securities. You can compare intermediate debt with short- and long-term debt instruments.
