What are Safe Haven Mutual Bond Funds - How is Deflation and Hyperinflation Monetizing Debt

Mutual bond funds safe haven in times of deflation financial crisis become popular. Mutual bonds funds invest in debt instruments. Their purpose is to receive income through interest receipts. The expectation is for a safe haven from collapsing asset prices or price deflation. Such events should see the appreciation of bond prices. There are different categories of mutual bond funds based on the debt instruments they hold. Mutual bond funds invest in corporate and government debt. Fear build when you see downward pressure building in the economy. Mutual bond fiends are seen as a safe haven when an economies underlying data is fragile in times of financial crisis.

Future expectations of the labor market or other countervailing forces lead to investors seeking a store of wealth. In today’s shaky times there is an overriding laundry list of potentially destabilizing headwinds. These are crucial in selecting mutual bond funds. You have the European contagion role and the state of municipal finances. Investors tend to gravitate towards bonds when concerns become more than a simple calculus involving inflation and unemployment. People want steady income and asset protection.

Mutual bond funds enable the risk and sector you want exposure to. Mutual bond funds enable diversification through management. The different bonds have different risks and yields dependent upon a risk matrix. Junk bonds and emerging nation bonds are considered the riskiest. Mutual bond funds are often used as a hedge in a portfolio by providing a steady income stream when stock funds values fall.

The first thing you need to determine you suitability to invest in mutual bond funds as a safe haven is to know your financial situation. Discuss all aspects of your current situation with your trusted financial advisor. In times of deflation and financial crisis security is foremost as is a steady income. Mutual bond funds are used generally to help provide a steady return to your investment portfolio. Determine what amount of assets you want to allocate to income stream and which to other assets such as stocks.

The state of the economy in times of fiat currency expansion requires a new macro prudential understanding. You need to require of your financial advisor a broader view of the threats to economic and financial stability. This has been a failing of many financial advisors and investors in the past.

Do not assume that this necessary development is not without cost. It will be however it is much healthier than the alternative of wealth destruction. The aim is to achieve piece of mind and a safe haven store of wealth. The Globalization of financial crisis through interlocking bailouts has created apparent ambiguities. This adds in stronger political uncertainties that you must be aware of.

Understand the underlying risk of a mutual bond fund. The possibility exists that the issuer of the individual bonds, be it nations, corporates or municipalities may default. In selecting a mutual bond fund it is essential to know what the underlying bonds are.

In inflationary times interest rates rise. This means the price or value of a bond falls. There exists an inverse relationship between interest rates and bond prices. That is why in deflationary times mutual bond funds become attractive. Thus the inflation or deflation outlook helps determine the interest rate risk of your mutual bond fund.

Early Payoff Risk

We have discussed the economic risks and the interest rate risk however you must be aware of other risks such as early payoff risk.  There exists payoff risk for many bonds depending on their structure.  This risk is the risk a bond may be paid off early. This is particularly important in deflationary times. When interest rates decline that means borrowers may look to pay off their debt and refinance at lower rates. In this circumstance you lose the benefit of receiving the high interest rate payments. In selecting your mutual bond fund manger you need to be assured as to the bonds duration and fixed periods. You need to know whether the manager be able to get commensurate returns should there be an earlier payoff.

Determine Your Risk Bond Risk Capacity

Another aspect of a mutual bond fund is to determine your asset blend. In other words do you want pure safe haven with a government guarantee or something riskier. This will determine the amount of interest you receive. Keep in mind of the risk of sovereign debt has increased since the Greece sovereign debt crisis. Determine what proportion of your mutual bond fund you want in low risk assets such as U.S. Treasury Bonds or high yielding junk boards. 

• Understand what credit ratings mean. Go here for an overview.

In selecting your mutual bond fund you must be comfortable that you are with the right institution to monitor both micro and macroeconomic risks. You also want to be assured the mangers remain independent from salesman or political pressure. Given we have experienced two years of the global financial crisis managers are fully aware of expectations. Question the mangers as to how they understand the complexity of the financial network and its systemic risks. After all that is what you are paying them for.

While I have tried to cover some of the initial risks you need to be aware of when investing in mutual bond funds here are a few more tips and warnings.

Tips

• Determine your risk reward profile in different economic conditions
• Keep abreast of interest rate and solvency trends

Warning

• We have just experienced a global financial crisis that still lingers, practice diversification and avoid a mutual bond fund that sounds too good to be true.
• Discuss your financial suitability and condition with your financial advisor Mutual bond funds safe haven in times of deflation financial crisis require caution and understanding.