Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! Your feedback or suggestions on future articles is welcome.
In our last article, we reviewed what a cash equivalent investment would consist of. Here, we’ll review bond funds, or fixed-income investments. A bond fund is actually a debt instrument, where the purchaser of the bond is lending money to the issuer of the bond, in return for interest. Bonds can be issued by government agencies and corporations, and are assigned a credit rating to help the buyer gauge the safety of the bond. Bonds are also categorized based on the maturity:
• Short term bonds mature in less than 5 years
• Intermediate bonds mature in 5 to 10 years
• Long term bonds mature in over 10 years
Bond funds are suitable for someone with a 5 to 10 year investment time frame and considered to be a medium risk investment. They are generally safer than stock funds, but bear more risk than cash equivalent funds. Bonds are subject to credit risk due to the fact that they are actually a loan.
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