How to Choose a Bond Fund
Choose a fund with low expenses., Select long-term or short-term bond funds., Look for reasonable yields for bond funds., Pick diversified bond funds or specific sectors., Find out what benchmark a fund uses.
Step-by-Step Guide
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Step 1: Choose a fund with low expenses.
One way to optimize total gain over time is to find bond funds that don't carry heavy expenses.
Such costs are charged by the fund managers for the work involved in the acquisition of bonds and operating the fund.
Evaluate the expense ratio.
Bond funds will note their expenses in the form of a ratio, a percentage of the total assets being managed.
It's therefore easy to compare the cost of doing business with one fund as opposed to another.
An expense ratio above one percent is considered relatively high. -
Step 2: Select long-term or short-term bond funds.
Another key step in choosing a fund is to decide whether you want to invest in short-, intermediate-, or long-term bonds.
Every bond is committed to a particular length of time (its time to "maturity").
A bond pays its owner interest until it reaches maturity.
Although long-term bond funds can be fine for someone who is choosing an extremely long-term investment, such as a young person's retirement fund, many experts counsel against using long-term bond funds for those who want quick yields.
For shorter-term trades, short-term bond funds are often preferred, because they are not as prone to wide swings in interest yields. , Fund managers and promoters will offer investors a predicted yield.
This is affected by many factors, an important one being "risk." In general, there is a limit to how much yield a fund can provide without taking excessive risks.
So it's a good idea to ignore funds that make unusually high interest projections.
All funds work within the same bond market, so be aware of current yields, and choose a fund that offers realistic interest projections.
Promises of higher-than-normal yields will imply higher-than-normal risks. , Diversified funds own a wide variety of underlying debt equities (bonds).
Some can be in the form of more stable government or municipal bonds, while others can be corporate bonds that may have a slightly higher danger of default.
Owning a diversified array of bonds is a good way to diminish risk in your portfolio.
If you opt for a specific sector of the market, think about whether you want to hold U.S.
Treasury, municipal (local government), or corporate (private) bonds.
Choose funds only after looking at their prospectuses to see which type(s) of bonds they hold. , Most funds will measure their success against an index used as a performance benchmark.
There are many such indexes available.
Investigate whatever index is used by the fund you're considering.
Learn whether the index is appropriate for your investment goals.
An advisor at the fund could help you make that determination.
S/he could probably suggest a fund most suitable to your needs. -
Step 3: Look for reasonable yields for bond funds.
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Step 4: Pick diversified bond funds or specific sectors.
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Step 5: Find out what benchmark a fund uses.
Detailed Guide
One way to optimize total gain over time is to find bond funds that don't carry heavy expenses.
Such costs are charged by the fund managers for the work involved in the acquisition of bonds and operating the fund.
Evaluate the expense ratio.
Bond funds will note their expenses in the form of a ratio, a percentage of the total assets being managed.
It's therefore easy to compare the cost of doing business with one fund as opposed to another.
An expense ratio above one percent is considered relatively high.
Another key step in choosing a fund is to decide whether you want to invest in short-, intermediate-, or long-term bonds.
Every bond is committed to a particular length of time (its time to "maturity").
A bond pays its owner interest until it reaches maturity.
Although long-term bond funds can be fine for someone who is choosing an extremely long-term investment, such as a young person's retirement fund, many experts counsel against using long-term bond funds for those who want quick yields.
For shorter-term trades, short-term bond funds are often preferred, because they are not as prone to wide swings in interest yields. , Fund managers and promoters will offer investors a predicted yield.
This is affected by many factors, an important one being "risk." In general, there is a limit to how much yield a fund can provide without taking excessive risks.
So it's a good idea to ignore funds that make unusually high interest projections.
All funds work within the same bond market, so be aware of current yields, and choose a fund that offers realistic interest projections.
Promises of higher-than-normal yields will imply higher-than-normal risks. , Diversified funds own a wide variety of underlying debt equities (bonds).
Some can be in the form of more stable government or municipal bonds, while others can be corporate bonds that may have a slightly higher danger of default.
Owning a diversified array of bonds is a good way to diminish risk in your portfolio.
If you opt for a specific sector of the market, think about whether you want to hold U.S.
Treasury, municipal (local government), or corporate (private) bonds.
Choose funds only after looking at their prospectuses to see which type(s) of bonds they hold. , Most funds will measure their success against an index used as a performance benchmark.
There are many such indexes available.
Investigate whatever index is used by the fund you're considering.
Learn whether the index is appropriate for your investment goals.
An advisor at the fund could help you make that determination.
S/he could probably suggest a fund most suitable to your needs.
About the Author
Henry Gibson
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