Invest in the best bond funds for 2010 and beyond or don’t invest in bond funds at all. With many interest rates approaching zero, the right funds can be the average investor’s best alternative for earning higher interest income. But there are 3 things you need to consider.
Most people don’t know how to invest in individual bond issues, so millions of investors rely on bond funds to get higher interest income. This way they can reap the benefits by owning a small part of a large professionally managed bond portfolio. Unless you own the best bond funds in 2010 and going forward you face two negative choices in the interest rate arena. First, earn next to nothing in CDs and money market investments. Or second, accept significant risk and earn diluted returns by owning the wrong funds.
The question is how to invest to increase your interest income without taking on any more risk or cost than is necessary. To this end, there are 3 things you need to consider when looking for the best bond funds: bond quality, short-term vs. long-term bonds, and the cost of investing.
The safest bond funds invest in the highest quality debt securities… U.S. Treasury bonds and notes. The problem is that these were yielding only 4% and 3% (10-year note) respectively in the late summer of 2010. You can increase your interest income by more than 1% and still have high quality by going with investment-grade bond funds that hold quality corporate bonds as well. Don’t push the envelope on quality to the level of high-yield (junk) funds unless you have a stomach for more risk. If the economy goes south again, default in these high risk bonds could result in heavy investor losses.
The real risk in bonds, and even for some of the best bond funds in 2010 and beyond, is INTEREST RATE RISK. Simply put, when interest rates go up significantly in the future, the value of existing bonds (with fixed interest rates) will fall as the interest they pay becomes less and less attractive relative to the new rates available. Long-term funds holding bonds maturing in 20 years or so will get hurt the most. Short term bonds and funds are much less affected. A good compromise of risk vs. yield is INTERMEDIATE TERM bond funds with average maturities in their bond portfolio of 5 to 10 years. A bond fund’s AVERAGE MATURITY is clearly stated in the fund’s description.
In your search for the best funds start by looking for a low cost of investing. Every sales charge, fee, or expense works directly against the investor to lower your net return. Why pay a sales charge (load) of 3% or 4% just to invest in a fund, and/or 1%, 2% or more in expenses and extra fees on a yearly basis? High quality NO-LOAD funds are available with NO sales charges, with total expenses of less than
