Hi Reader,
There’s Much More to Bond Mutual Funds Than Meets the Eye
Most diversified portfolios include some type of bond fund, but how much depends on your risk tolerance, goals, and time horizon.
Bonds are often seen as “safe,” but that doesn’t mean risk free.
Bond mutual funds pool money from investors and are managed by professionals who buy and sell bonds. Their value still fluctuates with interest rates.
Before investing, understand two key concepts:
- Duration measures how sensitive a fund is to interest rate changes. A four year duration means a one percent rise in rates could drop the fund’s value by about four percent.
- Credit Quality reflects the likelihood of default. Higher credit means lower risk and lower return, while lower credit means higher risk and potentially higher reward.
Bond funds come in many types including corporate, municipal, government, and high yield or “junk.” Each behaves differently, and not all are equally stable.
Inflation can also erode bond returns, which is why some funds use TIPS or Treasury Inflation Protected Securities to help offset rising prices.
If you’re adding bonds to reduce risk, choose carefully. Not all bond funds are created equal, and “high yield” means high risk.
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David N. Waldrop, CFP®
Owner of Bridgeview Capital Advisors, Inc. a Registered Investment Advisor.
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