How to Choose Bond Funds

Professionally managed bond funds can diversify your portfolio and provide you a steady stream of interest income. Shareholders have the options of receiving their interest payments in cash or reinvesting them. Managed bond funds can hold corporate, municipal and government bonds, or they can concentrate on international bonds and different bond sectors. You can research and select a bond fund that matches your risk and reward criteria.

Step 1

Determine your investment goals. For example, if you want to receive regular interest payments or if you are in a high-tax bracket and need a tax shelter, you could select a fund consisting of tax-free municipal bonds. People seeking the highest possible income would invest in a high-yield bond fund. If you are looking for safety plus a reasonable return, go with a high-quality investment grade bond fund.

Step 2

Know how much capital you want to risk. Risk-averse investors might want to consider a conservative bond fund that has capital preservation as its overriding priority. Investors comfortable with more risk can select a high-yield bond fund that holds low-grade corporate bonds or government-issued bonds from emerging markets. Also consider the credit rating of the entity issuing the bonds. For example, if you are interested in corporate bonds, read the prospectus to identify the companies selling them. Use an online credit rating service such as Moody’s, Standard & Poor’s, and Fitch to find its credit rating for a bond.

Step 3

Use a free online financial data provider to screen different bond funds. Compare the costs and fees that each bond fund charges its shareholders. High management fees and miscellaneous expenses can turn an attractive bond yield into a mediocre one. Look for funds with low expense ratios, and don’t overlook no-load bond funds that don’t charge you an upfront investment fee. Find out whether the fund charges a fee if you decide to sell your shares or to close your account.

Items you will need

  • Online bond fund scanner

Tip

  • For maximum portfolio diversification, consider a multisector or international and global bond fund that meets your risk-reward levels.

Warning

  • High interest rate bonds can look tempting, but high risk often goes hand in hand with high rewards. Make sure you are comfortable with the possibility of losing your principal and interest payments if the company defaults on the bonds.

Photo Credits

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About the Author

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.

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