Investing in Bond Funds

Investing in bond funds is not one of my particular favorites, due to the traditionally lower rates of return vs other investments, however, it does serve a purpose. Typically, bond funds have lower risk, and therefore become more attractive as people age, and become more protective of their money. Let’s look at some typical indicators to be aware of when evaluating bond funds:

  • Return
    Of course, return is what we are most interested in. But bond funds, like other funds, usually show an annualized rate of return averaged over a 1 year, 3 year, 5 year, 10 year, and since inception date. I pay most of my attention to the rate of return since inception. I like to know through the good times and the bad, how a particular fund averages out. So when I am evaluating different bond funds, the most important factor is the return since inception.
  • Inception Date
    As previously stated, the return since inception is most important to me, but it carries less weight if a fund has only been around for say, 6 months vs 10 years. I like to see a fund that has at least been around long enough to see a recession, and an expansion in the economy. Generally speaking, if a fund has been around at least 5 years, it probably has seen down and up markets.
  • Domestic or Foreign
    I will look at foreign stock funds, but not foreign bond funds. To me, if I am going to see less return due to investing in bond funds vs investing in stock funds, I am definitely not going to bear the load of increased risk due to foreign governments or foreign companies and their bond funds. I will stick to US bond funds only.

I have to be honest here, this is about all that has any importance to me when investing in bond funds. I don’t really care about the bond yield, because it is just a current snapshot of what a particular bond fund is doing. I want to know that the fund manager is making good decisions over time, and creating a quality average rate of return. Let me know what you think by leaving a comment or question below. Am I not looking closely enough at these funds? What would you do differently?

2 thoughts on “Investing in Bond Funds

  1. Currently, interest rates have nowhere to go but up. I hold some of my portfolio in fidelity strategic income fund. It invests primarily in debt securities by allocating assets among four general investment categories: high yield securities, U.S. Government and investment-grade securities, emerging market securities, and foreign developed market securities. The fund uses a neutral mix of approximately 40% high yield, 30% U.S. Government and investment-grade, 15% emerging markets, and 15% foreign developed markets engaging in transactions that have a leveraging effect on the fund. It has seen a ten year average annual return of 8.27%. Do you think that this fund will fare better than others in a climate of rising interest rates?

    • Ed:

      Generally speaking, when the stock market is up, the bond market is down, and vice-versa. The stock market usually reflects the condition of the economy pretty well. Thus, because the economy is down right now, bond funds should do well. But when the economy recovers, your money will likely produce more in a stock fund.

      I hope this was helpful.

      Thanks for your comments! Keep them coming!

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