| These days I get that question a lot - what is the | | | | There are high-yield funds that invest in high-risk |
| best bond fund for 2010? After the stock market | | | | bonds. They pay higher dividends because of the |
| volatility of 2008-09 people have realized that a | | | | higher risks involved but the bond in this fund are |
| portfolio needs to comprise of stocks and bonds. | | | | usually junk. So, this might not be the best choice. |
| In this article, we will discuss how bonds work and | | | | Next, we have long-term funds that pay |
| how to go about picking the best bond fund. | | | | above-average dividends. These bonds are |
| What are bonds? They are a form of loan, made | | | | exposed to higher interest rate risk so we might |
| to a company. The owners of the loan are called | | | | not want to consider these. We also have foreign |
| bondholders. Each bond is issued with a fixed face | | | | funds. But these are exposed to foreign |
| value, has a coupon rate associated with it and a | | | | exchange risk or currency fluctuations. These are |
| date of maturity. | | | | a little risky for our liking. |
| The amount an investor pays to buy the bond is | | | | We also have lower dividend paying funds like |
| called the face value. This payment entitles the | | | | government funds. These funds invest in U.S. |
| bondholder to receive interest payments at fixed | | | | Treasury bonds, which are safe as it gets. |
| intervals (usually every six months). On the date | | | | Although they are safe, their dividends are pretty |
| of maturity (which is known in advance), the | | | | low and they aren't an ideal investment for us. |
| principal (or the initial payment made) is paid back | | | | So, what would the best bond funds look like? |
| completely. | | | | They will have higher-quality bonds which mature |
| Bonds have been an ideal choice for investors | | | | in the medium-term. They don't have to be the |
| looking to get a higher return than they would get | | | | best quality because the dividends would be too |
| from CDs, US treasuries etc. Investing in individual | | | | low for our liking. There are bond funds which are |
| bonds is a little more involved and requires | | | | offered by mutual funds companies. They have |
| experience and knowledge. | | | | yields above 6% but they can be expensive to |
| This is where bond funds are a great option. They | | | | own. |
| are professionally managed funds that yield | | | | We like no-load, medium term bond index funds. |
| dividends and are usually low-cost funds. We have | | | | They are cheap and their annual expenses are |
| a couple of options that need further discussion. | | | | low. |