The Rise of Bond-type Funds

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Since the demise of the economy in 2008, it is slowly coming back in baby steps, which means that the economy is still far from full recovery. The economy is teetering on a very thin line, and many fear that the economy will never be able to reach full recovery. Nevertheless, it is natural instinct for humans to find a way to survive, and among them, bond-type fund is in the limelight.

With the sluggish recovery of the economy, many are seeking bond-type funds as a method to relieve their tightening pockets. Before going on with bond-type funds, let’s define the term funds. Funds are an indirect investment instrument that gathers funds from multitude of clients to form a common purse in a large scale and in which professional management institutions invest in stocks and bonds, and divide the outcome among their clients. Unlike interest rates offered by banks, it is a product based on dividends by performance outcome. So it could generate high profits according to the earnings or pay out less money than its initial investment due to its investment loss.

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In 1999, when stock market was booming, there were numerous funds that had 100 rate of return where as in 2000 there were countless funds that scored minus rate of return and some even showed 70 percent loss in its initial investment. From the second half of last year to the first half of this year, the average rate of return was around 50 percent but currently most are scoring minus rate of return.

Funds are categorized as stocks, mixed and bonded according to how much of the money is invested. If more than 60 percent is invested, it is categorized as stocks and bonds. If not it goes in the mixed category. When categorized according to whether you can repurchase the product or not, there are two categories: open fund and closed-ended fund. When categorized according to whether it is contractual or a corporate type investment, there are two categories: beneficiary certificate and mutual funds. Other types of funds are index funds, umbrella funds and etc. Thus, bond-type funds are not an operation object of stocks but they are products that invest more than 60 percent trust property into bonds and bond related derivatives.

For elderly people the biggest concern is probably low interest rates and skyrocketing prices. Currently, Korea’s one year fixed deposit interest rate is approximately one percent. Consumer price index has risen four percent in comparison to last year which means depositing your money in a bank can actually drop the value of your money since you only receive three percent interest. The bigger problem is that interest rate is expected to be kept low for a while and some even speculate that the situation can even worsen.

In times of such low interest bond-type funds are gaining popularity. Unlike stocks, bonds generate constant interests and although there is the down side of an immediate loss during times of economic crisis, you can easily recover the damage. However, like the saying every cloud has a silver lining, there is a way to save your neck. In times of hardship, we have to keep in mind it is not the end. All we have to do is find that silver lining in every cloud.

By Min Ho Jung (loveus92@hanmail.net)

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