How to Invest in Short-Term Bonds
Bonds don't get nearly the attention that stocks do in the financial press. Bonds are far less volatile and therefore far less exciting. While stocks represent the equity ownership of a company, bonds represent the debt that the company has borrowed. Bond investors are typically looking for a conservative investment option or an investment that generates cash flow, as opposed to capital gains. Short-term bonds are bonds issued by corporations that have a maturity of less than five years, meaning they will be fully repaid plus interest within five years. Bonds can be purchased individually. But buying bonds via a bond mutual fund is often easier and more convenient.
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Instructions
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Decide if you're going to buy short-term bonds directly or invest in short-term bond mutual funds. Buying bonds individually is done via a brokerage account and investors pay commissions on each transaction. Buying bond mutual funds is done via mutual fund companies or retail financial advisers and investors pay fund fees as opposed to commissions.
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Decide if you want to work with a professional financial adviser or do the investing yourself. Professional advisers typically look for wealthy clients, so if you only have a small amount to invest, you may have to go it alone. Both short-term bonds and short-term bond mutual funds can be bought without the help of a professional adviser.
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Make your investment. If you're going to work with an adviser, they will handle all of the paperwork for the transaction. If you're handling your bond investing on your own, you'll likely do most of the work through the website of an on line discount broker or mutual fund company. Expect to start with a minimum investment of no less than $1,000.
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Keep investing. Since short-term bonds mature every couple of years, you'll need to keep buying new bonds when your existing bonds are repaid. If you invest in short-term bonds via mutual funds, the fund company will handle this for you. But you should compare which fund company you're working with to others in the market every few years.
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Tips & Warnings
Buying bonds via bond mutual funds adds some cost to your investment as you must pay management fees for the mutual fund but mutual funds add diversification to your investment strategy which reduces your overall risk.
Short-term bonds make for conservative investments, so don't expect a large rate of return.
References
- Photo Credit A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com
