Performance of Fixed-Income Mutual Funds
Fixed-income mutual funds usually aren't going to perform like stock funds. By their nature, fixed-income investments are relatively conservative, and lower returns come with a conservative approach. On the other hand, a conservative approach should also bring a less volatile price and return rate, giving you a steady performer that you can rely on for your income needs.
When you compare bond funds, there are two key performance metrics -- returns and price. The fund's returns tell you how much income you can expect to earn from it. Its price fluctuation helps you project the risk that your principal faces. A fund with very little price fluctuation is one that's safer than one with a price that fluctuates a great deal. One of the most often discussed performance metrics, though, is largely a non-issue. As long as your fund has a strong after-expense return, the cost becomes immaterial.
One of the largest determinants of a fund's return is the duration of the bonds that it holds. Generally, longer term bonds are riskier than shorter term bonds and carry higher returns as compensation. The reason for this is that the longer a bond lasts, the more interest rate risk its investors take. While it's unlikely that interest rates will change a great deal in a week, they could do just about anything over a 30-year period.
Funds also differentiate themselves on the types of bonds that they hold. A fund holding U.S. Treasury bonds will usually offer lower returns than one holding bonds issued by U.S. corporations. On the other hand, a municipal bond fund, for which returns are federal tax-free and -- as long as you live in the state in which you buy it -- state tax-free, may offer a lower return than a U.S. Treasury fund that is only state tax-exempt, although you'd come out ahead after taking your tax savings into account. You can also buy funds that own foreign bonds, adding diversification but also the potential for more risk.
A bond fund's overall risk level is measured by the credit ratings of the bonds it holds. In most sectors of the bond market, you can find similar bonds that vary only by the quality rating. For example, a corporate bond issued by a large blue chip company will probably have a much higher credit rating than a corporate bond issued by a start-up in the same industry. A municipal bond issued by a financially stable community or state would have a better credit rating than one from a shaky government. Differing risk levels bring different returns, with riskier bonds being classed as "high-yield" investments because of their higher interest rates.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.