What You Need to Know About Investing in Bond Mutual Funds
by Annette Thau
For every type of bond that exists, there exists a corresponding bond fund. There are bond funds that invest in Treasuries, in municipals, in mortgage-backed bonds, in international bonds, of every credit quality, and in every imaginable combination. Bond fund returns vary from fund to fund, from category to category, and range from the very good to disastrous. Moreover, returns vary widely over time: in 1994 and 1999, returns for almost all bond funds were very poor. But in 2000 and 2001, returns for bond funds were very good and, in fact, overall exceeded those of mutual funds investing in stocks.
Bond funds are a unique investment product. True, they share a number of characteristics with mutual funds that invest in stocks. They also share some characteristics with individual bonds.
But bond funds and individual bonds should not be viewed as interchangeable investments. Indeed, bond funds differ from individual bonds in some important respects. There is an enormous amount of information available concerning mutual funds, and that includes bond funds. Quite a lot of this information is confusing. This article will focus on some of the basics that you need to understand when choosing a bond fund.
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