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How Can I Compare Bond Mutual Funds?

You can compare bond funds by looking at certain characteristics to determine which funds offer the best balance of risk and return for you.

Credit Quality/Rating

Credit quality is an analysis of a bond issuer's ability to repay its bonds and make interest payments on time. Several independent credit rating agencies—including Standard and Poor's, Moody's Investors Service, Fitch and Duff & Phelps—analyze bond issuers and rate their bonds. The ratings generally range from AAA (highly unlikely the issuer will default on payment) to D (the issuer is already in default).

When analyzing a bond fund, it's important to look at the credit quality of the bonds in the fund's portfolio. If a fund invests in bonds with strong credit quality, it may pay a lower interest rate because it's considered a safe investment. If the fund invests in bonds with weaker credit quality, it may pay a higher interest rate to attract investors because the bonds have greater risk of default.

Maturity

Maturity measures the length of time until the issuer must pay the investor. Short-term bonds generally mature in less than three years, intermediate- term bonds generally mature in three to 10 years, and long-term bonds generally mature in more than 10 years.

Since bond funds usually own many bonds with different maturities, a bond fund reports the average maturity of all the bonds in its portfolio. The average maturity is weighted by the dollar amount of each bond held in the fund.

If a fund invests in bonds with longer maturities, it generally will have a higher interest rate but will be more susceptible to certain risks. For example, the longer the fund's average maturity, the more the fund's price will fluctuate as interest rates change. A fund investing in bonds with longer maturities also has more risk of its income not keeping pace with inflation.

Duration

Duration measures a bond's sensitivity to changes in interest rates and takes into account the bond's maturity and the interest it pays. Duration is a good way to compare bond investments that have the same maturity but pay different rates of interest.

A bond fund reports average duration to measure the sensitivity of all the bonds in its portfolio to interest rate changes. The greater the fund's average duration, the more its price will fluctuate as interest rates change.

If you are seeking to diversify, reduce risk or generate regular income, you may want to consider how bond mutual funds fit your investment plans.

Introduction: 

How Can I Compare Bond Mutual Funds?

You can compare bond funds by looking at certain characteristics to determine which funds offer the best balance of risk and return for you.

Credit Quality/Rating

Credit quality is an analysis of a bond issuer's ability to repay its bonds and make interest payments on time. Several independent credit rating agencies—including Standard and Poor's, Moody's Investors Service, Fitch and Duff & Phelps—analyze bond issuers and rate their bonds. The ratings generally range from AAA (highly unlikely the issuer will default on payment) to D (the issuer is already in default).

When analyzing a bond fund, it's important to look at the credit quality of the bonds in the fund's portfolio. If a fund invests in bonds with strong credit quality, it may pay a lower interest rate because it's considered a safe investment. If the fund invests in bonds with weaker credit quality, it may pay a higher interest rate to attract investors because the bonds have greater risk of default.

Maturity

Maturity measures the length of time until the issuer must pay the investor. Short-term bonds generally mature in less than three years, intermediate- term bonds generally mature in three to 10 years, and long-term bonds generally mature in more than 10 years.

Since bond funds usually own many bonds with different maturities, a bond fund reports the average maturity of all the bonds in its portfolio. The average maturity is weighted by the dollar amount of each bond held in the fund.

If a fund invests in bonds with longer maturities, it generally will have a higher interest rate but will be more susceptible to certain risks. For example, the longer the fund's average maturity, the more the fund's price will fluctuate as interest rates change. A fund investing in bonds with longer maturities also has more risk of its income not keeping pace with inflation.

Duration

Duration measures a bond's sensitivity to changes in interest rates and takes into account the bond's maturity and the interest it pays. Duration is a good way to compare bond investments that have the same maturity but pay different rates of interest.

A bond fund reports average duration to measure the sensitivity of all the bonds in its portfolio to interest rate changes. The greater the fund's average duration, the more its price will fluctuate as interest rates change.

If you are seeking to diversify, reduce risk or generate regular income, you may want to consider how bond mutual funds fit your investment plans.

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