Money 101  >  Explainers

Here's why you should consider bond funds when rates are down

POSTED ON May 20, 2019

People who invest in bond funds are often calm when the economy is not doing well. Why?

Let’s first look at what bonds are. They're investments where you -- as an investor -- lend money to a government or a company who promises to pay you back after a few years. Works like an IOU.

During the time between when you invested and when you got your money back, you’re paid an interest.

Now, what are funds? They're instruments or "vehicles" for people to invest. Think of a fund as a bus you ride together with other people on your investment journey.

How far the bus goes depends on the engine powering it. Or in this case, what investments are inside.

So a bond fund is a fund with bonds in it. Simple, right?

Investing in bond funds

Bond funds increase in value as the interest from the bonds inside come in. 

Sometimes, the value of a bond fund will go down. This happens when there isn't a lot of demand for bonds.

This could happen because there are better bonds coming out. It could also be because the interest is being reinvested in bonds that are not so good.

Still, bond funds are good in times of economic uncertainty, especially the short-term ones. They let you grow your money in a shorter time, then you can reinvest. This gives you the opportunity to reevaluate your options in case circumstances change—or when the economy improves.

Meanwhile, long-term bond funds have bonds with higher interest rates than short-term ones. And if new bonds give lower interest, there's more demand for them, raising value.

Think of the short-term and long-term as two different bus routes. You could take a short route, see how bad traffic is and choose a different route. Or you could take a long route and trust that you’ll get where you need to be in time.