How to Invest in Mutual Bonds
For most investors the best way to invest in bonds is through bond mutual funds. Bond funds provide diversified portfolios, professional management, monthly dividend payments and the ability to reinvest and compound those dividends. The process of investing in a bond mutual fund includes selecting a fund and completing the investment in the fund.
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Instructions
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Select the type of bond fund that meets your investment criteria. Bond funds can own government bonds, investment-grade bonds, high yield--junk--bonds and municipal bonds. Government and investment-grade bonds are the safest, high-yield bonds provide high returns and opportunities for capital gains, and municipal bonds pay tax-free income at lower yields. Broad-based bond funds will own a range of types.
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Research mutual fund candidates for your investment. A mutual fund screener from Morningstar, Yahoo! Finance or the Business Week Mutual Fund Scoreboard will help narrow the choices of bond funds. Financial magazines like Money and Kiplinger have regular articles picking top mutual funds.
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Review your list of bond funds to pick the one to three funds best suited for you. Look up each fund's website and note the minimum investment amount, expense ratio, portfolio composition and current dividend yield. This data will allow you to pick the funds that best fit your investment goals.
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Apply online or download an account application from the websites of your selected bond mutual funds. Follow the fund's directions to send in your initial investment amount. Bond mutual funds shares are purchased directly from the mutual fund company.
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Tips & Warnings
Stick to no-load bond funds if you are doing your own research and save the cost of commissions.
The Kiplinger magazine article linked in this article provides the names of some top all-in-one bond funds. These funds may be appropriate for investors looking for broad bond market exposure with one or two bond mutual funds.
Select your bond funds based on the funds investment objectives and expense ratios, not the current yield. Bond fund investors should focus on total return and safety of principal.
Although most bond funds are less risky than stock funds it is still possible to lose money with bond mutual funds. The Securities and Exchange Commission notes that bond fund investors are exposed to several types of investment risk. It is important to do your own research and understand the risks before investing in any bond mutual fund.
