Types of Bond Mutual Funds

Actively Managed Bond Mutual Funds

The most common type of bond funds, open-end funds, are actively managed bond funds that allow you to buy or sell your share in the fund whenever you want. You buy and sell at a fund's net asset value (NAV), which is the value or price per individual fund share and is priced at the end of each trading day—not throughout the day, as is the case with stocks.

Index Bond Mutual Funds

These funds are passively managed and are engineered to match the composition of a bond index, such as the Lehman 10-year Bond Index. Once the fund is constructed and trading, very little human intervention takes place; the fund's performance is structured to track that of the index it mirrors.

Regardless of the type of bond mutual fund you select, keep these points in mind:

1. Return of principal is not guaranteed because of the fluctuation of the fund's NAV due to the ever-changing price of bonds in the fund, and the continual buying and selling of bonds by the fund's manager.
2. As with direct bond ownership, bond funds have interest rate, inflation and credit risk associated with the underlying bonds owned by the fund.
3. In contrast to owning individual bonds, there are ongoing fees and expenses associated with owning shares of bond funds.
4. As with individual bonds, you pay income tax on bond interest according to your tax bracket, not the 15% rate recently afforded to stock dividends. See Understanding the Act.

Pop Quiz Question: You just invested $5,000 in a bond mutual fund that invests primarily in government bonds. Could you ever receive a statement that shows the value of your investment to be worth LESS than this initial amount? Yes     No Check Your Answer