How to Manage a Bond Fund

New investors often feel most comfortable starting out with bond funds. With the most popular bond funds backed by the U.S. government, it's not hard to see why. Since many people assume bond funds involve investing only in the government, you might be surprised to learn that bond funds can actually be quite diverse. In addition to the wide variety of U.S. bonds, it's also possible to invest in corporate and foreign government bond funds.

Difficulty: Challenging

Instructions

Things You'll Need:

• Financial advisor
• Bond fund

Understand Your Bond Fund

1. Learn about bond funds.The objective of bond funds is to provide investors with stable income. The maturity date of bonds can vary, depending on the current interest rate.

2. Decide why you're interested in investing in bond funds. If you like the idea of having a diverse portfolio that is relatively easy to manage, you're on the right track.

3. Discover the inner workings of your fund. Bond funds are connected inversely to interest rates. When interest rates go down, the value of your bond fund will go up.

4. Take a look at the credit quality of the bond. High-credit bonds (AA and above) are the least risky, but provide a lower yield. Inversely, low-credit bonds (BBB and below) have higher risk and higher potential profits.

5. Make sure to diversify your portfolio. Similar to stocks, most investors manage their portfolios through bond diversification. This helps lower risk levels, as your money is spread over low-risk and high-risk investments.

6. Turn to your financial adviser for help. Bond funds can be easy to manage, but sometimes diversification leads to complication. It's better to get advice from your financial adviser than to miss out on an opportunity to buy or sell.

Tips & Warnings

• Keep in mind that bond funds are also known as debtholder funds.
• If you have less than $100,000 to invest, consider placing your money in a municipal-bond fund. These funds are good for small-to-medium investments, and they are tax free.
• Don't confuse bond funds with traditional bonds. Unlike traditional bonds, bond funds aren't fixed-income investments.
• Bond funds do not have a fixed yield, nor are they contractually obligated to give investors back their principle at a later date.
• Although bond funds are considered a relatively low-risk investment, remember that bonds can experience a bear market, too.
• Proceed with caution when investing in foreign bonds. Emerging-market bond funds are among the riskiest investment options.