Investing in Bond Funds
Bond funds are mutual funds that invest in bonds, rather than in stocks. Bond funds are often less risky than stock funds, but more risky than money market funds or guaranteed investments like savings accounts, CDs or individual U.S. Treasury bonds. Bond funds may appeal to investors who have intermediate-term investment goals, or who desire a balance of risk and potential return, or a balance of income and growth.
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Instructions
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Look for investment companies that offers bond funds. Many major mutual fund companies and discount stock brokers have a variety of bond funds. If you already have an account at an investment firm, such as one that manages your retirement funds, you may want to look at that company's bond funds first.
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Decide what types of bonds you want to invest in. Some bond funds only invest in U.S Treasury bonds, municipal bonds, bonds that are tax-free for residents of a particular state, mortgage bonds, corporate bonds, or high-yield bonds (also known as "junk" bonds), while others include a mix of bonds.
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Find out the average quality, or credit risk, of the bonds the fund invests in. Bonds that are rated AAA, such as U.S. Treasury bonds are the highest quality, meaning that there is little risk of the creditor defaulting. AAA, AA, A, and BBB bonds are generally considered investment quality, while anything BB or lower is considered a high-yield or junk bond. These bonds generally pay higher interest rates, but also have a higher risk of defaulting.
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Select an average length of maturity of the bonds. Some bond funds concentrate on short-term, intermediate or long-term bonds. In general, shorter term bonds pay lower interest rates, but may also be less subject to the risk of losing money due to changes in interest rates.
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Compare how several bond funds have performed over the last year, as well as the last five years and ten years. This information doesn't guarantee how the bond fund will perform in the future, but it gives investors an idea of the fund's average rate of return.
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Find out the expense ratio of the bond fund, or how much the investment firm charges to manage the fund, as well as any fees. Look for no-load funds that do not include a sales commission.
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Download prospectuses for any bond funds you are interested in from the company's website. Review the bond fund's prospectus carefully before investing to fully understand all the potential risks and benefits of the fund.
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Tips & Warnings
You may want to compare bond funds from several companies to find the best deal, since some companies charge lower fees for their bond funds than others.
Bond funds may have several types of risk, including credit risk, prepayment risk and interest rate risk. Investors may lose money in bond funds, even with funds that invest only in U.S. Treasury securities or high quality bonds.
