| If you know how to invest in bond funds it can | | | | 15 years or more. The risk here is called interest |
| be quite profitable. If you invest in bond funds like | | | | rate risk. If interest rates go up significantly, the |
| many people do to get high income, pay attention | | | | value of these funds will fall significantly. What you |
| to three things. Because if you do not know how | | | | earn in dividends (interest) will pale vs. your loss |
| to invest with care you could live to regret the | | | | of principal. How to invest prudently: go with high |
| risk you took. | | | | quality and shorter-term bond funds. An |
| Few average investors know how to invest in | | | | intermediate-term fund with an average maturity |
| bonds as individual securities, so they invest in | | | | of 5 to 10 years is a good compromise of risk vs. |
| bond funds instead in search of high interest | | | | yield. |
| income in the form of dividends. That's just fine if | | | | The second area to consider is tax-exempt (tax |
| you know how to invest and what funds to pick. | | | | free) municipal bond funds. If you are in a higher |
| In 2009 billions of dollars flowed into bond funds | | | | tax bracket of 25% or more give them serious |
| while billions flowed out of stock funds, as | | | | consideration. If not, don't invest here just to get |
| investors chased these safer income-producing | | | | dividend income that is free of federal income |
| investments. Some made prudent decisions and | | | | taxes. For example, it's better to get 6% and pay |
| some made mistakes in at least one of three | | | | income taxes than to get 4% tax free if you are |
| areas. | | | | only paying 15% out at tax time. But if you can |
| Bond funds manage a diversified portfolio of | | | | get 5% tax free vs. 6% taxable and pay a 25% |
| income-producing securities for investors. You pick | | | | tax rate, municipals become attractive. |
| the fund and management does the rest. There | | | | Third, pay attention to the cost of investing |
| are always risks involved and always a cost of | | | | before you invest. Why pay a 4% sales charge |
| investing. Here's a guide to how to invest in bond | | | | up front and 1% to 2% a year in expenses and |
| funds while limiting risk and costs by paying | | | | other fees just to earn dividends of 5% or so a |
| attention to three areas. | | | | year... with a moderate level of risk? Here's how |
| The first involves picking bond funds that pay the | | | | to invest in bond funds without being fleeced: buy |
| most interest, or pay the highest dividend yield | | | | funds from no-load fund companies like Vanguard, |
| (income). For example, there are two easy ways | | | | Fidelity, and T Rowe Price. Look at expense |
| to get a higher yield of 7% or 8% a year (in | | | | ratios, which are easily found in fund literature. |
| income) vs. more like 5% or 6%. You can buy | | | | Bond funds are available at a total cost to the |
| high yield funds and sacrifice quality. These are | | | | investor of ¼% a year, for expenses. If |
| also referred to as junk bond funds because the | | | | you don't know how to invest in bond funds on |
| credit risk or risk of default is high. In other | | | | your own go to the internet and check out |
| words, some of the bonds in the portfolio may | | | | "no-load fund" companies. Then give them a call |
| default and not pay interest as promised; and | | | | for free information and an account application. |
| some might become worthless. | | | | The cost savings can mean thousands of dollars |
| Or, you can get higher yields by buying long-term | | | | to you over the years, just for your effort. |
| funds that hold bonds that mature (on average) in | | | | |