Bond Mutual Funds

Mutual funds have become a preferred way to invest for millions of Americans. A mutual fund is simply a pool of money invested for you by an investment firm in a variety of instruments like stocks, bonds, or government securities. Each mutual fund is different in its make-up and philosophy.

A bond mutual fund is a mutual fund that invests in bonds. Bond mutual funds can contain all of one type of bond (munis, for instance) or a combination of bonds. Each bond fund is managed to achieve a stated investment objective.

Good Reading Investment companies that issue mutual funds are required by the SEC to provide you with a copy of the mutual fund's prospectus. A fund's prospectus contains the formal written offer to sell securities. It also sets forth specific information about the fund, including its investment objectives, risks, performance, fees and expenses, how to buy and sell shares, and how the fund is managed. You should read a fund's prospectus carefully before you invest.

Like most investments, bond mutual funds charge fees and expenses that are paid by investors. These costs can vary widely from fund to fund or fund class to fund class. Because even small differences in expenses can make a big difference in your return over time, we've developed an expense analyzer to help you compare how sales loads, fees, and other mutual fund expenses can impact your return.

Before investing in a bond mutual fund, find out if it's a load or no-load mutual fund. Load funds charge a sales commission; no-load funds do not. When you pay a sales commission going in, that's called a front-end load. A commission paid when you sell is known as a back-end load. The fee table is generally found at the front of a mutual fund's prospectus.

There are a number of reasons to consider bond mutual funds:

• They offer a convenient way to invest in a diversified portfolio of bonds (you simply contact your broker or fund company)—and do so in a way that is far more affordable than if you had to buy each bond individually.
  
  
• Bond mutual funds offer a variety of investment objectives. A bond mutual fund might invest in a particular bond category (government, corporate, muni) or a particular maturity range (short-term, intermediate, long-term). Many bond funds offer a combination of maturity ranges and bonds from multiple categories.
  
  
• Interest reinvestment is easy with a bond mutual fund. Funds pay "dividends" monthly (as opposed to semiannually for most individual bonds). You can request to have these payments automatically deposited back into the fund.
  
  
• You can also invest incrementally. Most mutual funds allow you to invest even small amounts on a regular basis, as well as make additional investments as you wish.
  
  
• Finally, bond mutual funds offer considerable liquidity, you can generally get your money out of the fund quickly.