How to Invest in Corporate Bond Funds
Corporate bond funds own debt securities issued by corporations. A bond fund provides an investment in a diversified portfolio of corporate bonds and professional management of the portfolio. A bond fund will pay monthly dividends that can be taken as cash or reinvested into more shares of the fund. An important step in bond fund investing is the selection of an appropriate fund.
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Instructions
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Select which classification of corporate bond fund you want to own. Investment-grade bond funds own bonds with credit ratings of BBB or higher and are considered secure income investments. High-yield bond funds will own non-investment grade or "junk" bonds. Total return bond funds give the fund manager the latitude to select the bonds that he believes will provide the best overall return to investors.
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Develop a list of corporate bond fund candidates. The Bloomberg/Businessweek mutual fund scorecard allows you to select fixed-income funds and get a list of all bond funds along with useful data. Narrow the criteria and sort through the list. Corporate bond funds show up by a process of elimination. You want intermediate- and long-term funds without government, municipal or global bonds included in the fund category. If you want to quickly find some recommended funds, CNN Money and Kiplinger offer suggestions (see Resources).
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Compile a matrix of the attributes of the bond funds on your list. Data columns should include expense ratio, portfolio average credit rating, portfolio duration or average maturity, three-year average return, five-year average return, minimum investment amount and current dividend yield. The information can be found on the Web page for each fund.
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Evaluate your matrix of bond funds to select the fund or funds that fit your investment goals. The three- and five-year returns will show how the funds have performed against their peers. Here are some tips on the other data points:
Expense ratio: Lower is better, as higher expenses reduce the dividend yield.
Duration or maturity: Longer is better in a falling interest rate environment; shorter is better if rates are rising.
Credit rating: Lower indicates more risk. If a bond fund owns mostly BBB through AA corporate bonds, it is focused on investment-grade securities. If the bond portfolio is CCC through BB, the fund owns high-yield, riskier bonds.
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Download an account application from the website of your selected fund or funds, complete the application and mail it to the mutual fund company with a check for your initial investment.
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Tips & Warnings
This process will take a significant amount of time. You are investing money, and you should understand the reasons why you selected a particular corporate bond fund.
Many top-rated bond funds have sales charges and are sold through brokers. If you have $100,000 or more to invest, you can get a significant discount on the sales charge.
If you use a broker to invest in a fund, use the same criteria to evaluate the fund or funds recommended by the broker.
Corporate bond funds include the risk of credit downgrades and interest rate fluctuations. Bond fund shares can go down in value as well as up. Do your own research and understand the risks before making any investment.
