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Why index bond funds are good for risk diversification
Index bond funds are very popular with numerous investors for several reasons, and they can play a big role in portfolio risk diversification as well. These funds are good for risk diversification in several ways. Index funds will contain many different holdings, so you will start out with an investment that can be diverse from the very beginning. These funds are built using a specific index for guidance, and the holdings will mirror those of the index being followed in the hopes that the performance will also be similar. Diversity in your investment portfolio is the best way to manage risks, and this is what index fund choices can offer. This is just one of the reasons that these choices have seen increased popularity among investors, because they can offer risk diversification benefits.
Index bond funds which have true diversity will have different types of holdings, such as different maturity ranges and various issuers, as well as many sectors that may be included. This will help even out the risks across the fund holdings, so that no large losses will normally occur because of market fluctuations or economic activity. When a portfolio is well diversified then small gains will normally be seen, even if some sectors of the market have had substantial losses, because other sectors will usually do better than expected as well. This helps to diversify the market risks and help protect your capital, so that these risks are not as big of a problem as they could be otherwise.
Other benefits with index bond funds is that they are convenient and affordable. It would cost an enormous amount of money to build up a diverse portfolio with one holding at a time, but you can try and get the same performance as an index fund if you purchase all of the bonds that the fund holds. A better way to do this is to choose index bond funds instead, so you can invest an amount of capital you are comfortable with, and get a diverse portfolio of holdings with one single convenient transaction instead. These options are passively managed, so you will not pay a lot in management fees, and you can purchase shares of these investments in almost any budget.
There are many reasons why index bond funds may be chosen by an investor, but one of the most frequent is the risk diversification you will get when you invest in these funds. Portfolio management is easy, and you do not have to spend a lot of time analyzing your portfolio to ensure that it is balanced. That does not mean you do not have to research each possible fund choice, because they will vary significantly and may have very different holdings. Some of these choices may be a perfect fit with your investment strategies and goals, and others will not be. Evaluate each investment option completely before you make a final decision on whether or not a specific index bond fund is the right choice for your investment capital.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.
|Bond Investment1 Jun 2010|