Retirement Funds —
Bond Funds
Bond Mutual Funds
Bond funds: Instead of purchasing individual securities,
an investor might decide to purchase shares of a bond
mutual fund. Advantages include broad diversification,
liquidity, and on-going professional management. In
addition, bond fund accounts can sometimes be opened
for $500 or less, making them attractive for persons
with small dollar amounts to invest. The biggest disadvantage
of bond mutual funds is that, unlike individual securities
and UITs, there is no fixed maturity date. Thus, the
price of shares is always subject to fluctuation with
changes in interest rates, and an investor could lose
principal if interest rates increase. As with all mutual
funds, the key factors to look for when selecting a
bond fund are historical performance and expenses.
Unlike stock funds, that have the potential for capital
appreciation to offset fund expenses, bond funds must
rely on low management costs to enhance their returns.
In addition, bond funds generally invest in similar
securities (e.g., Treasuries), so most of the difference
in return among bond funds is due to differences in
cost. The average annual expense ratio (expenses as
a percentage of fund assets) for bond funds is about
1% ($1 for every $100 invested), but there are some
low-cost fund families like Vanguard, T.Rowe Price,
TIAA-CREF, and Fidelity that charge significantly less.
A 1997 study of bond mutual funds by Consumer Reports magazine
found that, among government bond funds, funds with
low expense ratios outperformed their peers. One low-cost
bond mutual fund is a bond index fund. Bond index funds
purchase the same securities that comprise a benchmark
bond index, such as the Lehman Brothers Aggregate.
Since the portfolio of securities is pre-determined
by whatever bonds comprise an index, trading costs
are minimal and bond index fund management expenses
are low. Like individual bonds, bond funds with the
longest maturities are extremely volatile when interest
rates fluctuate. Conservative investors should select
short-term bond funds consisting of investment-grade
securities.
Additional Resources
About.com
Securities
and Exchange Commission site on bond funds
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