How to Invest in Mutual Bond Funds
Whether you are looking for current income, safety or a combination of both, bonds and bond mutual funds can be a good investment. Bond mutual funds can also be a good balance against the risk of stock market investing and many investors find that a balanced approach between stocks and bonds is the best approach.
But even though bond mutual funds can be a good investment, it is important to choose those funds wisely.
7 Steps to Invest in Mutual Bond Funds
Choosing a Bond Fund
1. Read financial newspapers like Barrons or the Wall Street Journal.
These publications provide a great deal of information about bonds and bond funds.
2. Look at the average duration of any bond mutual fund you are considering.
All bond funds include an element of risk, including interest rate risk. Bonds with a longer duration will typically have a higher yield, but they will also be subject to more interest rate risk.
As interest rates rise, the value of the bonds in the fund will tend to decline and this could adversely affect the value of your investment. If interest rates are at historically low rates, choosing a bond mutual fund with an average maturity in the one to three year range can limit your risk.
3. Contact the mutual fund company and ask for a prospectus for each bond mutual fund you are considering.
Review the expense information and the performance data carefully. The expense ratio for a bond mutual fund should be under 0.50 percent–a higher expense ratio can take a big bite out of your return.
The prospectus should also provide a comparison of the performance of the fund against the applicable bond index–this will allow you to choose a fund that has consistently outperformed those averages.
Making Your Investment
4. Contact the mutual fund company for an application.
In many cases the application form will be available online, making investing both fast and easy.
5. Complete all of the required information when completing your bond fund application.
Be sure to include your full name, address, Social Security number and other identifying information. This information is needed for tax purposes.
6. Select a funding method for your bond mutual fund.
Many mutual fund companies allow investors to transfer money directly from a bank account, using the routing number and account number. Other mutual funds will require you to send a check. Either way, be sure to print out a copy of your application and keep it in a safe place.
7. Create an online account and check your balance to make sure your purchase has been credited.
Track the performance of your fund on a regular basis to make sure it is meeting your needs.
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