Evaluating a bond fund

The first step of investing in any bond fund is to understand what kinds of bond investments the fund makes. Read through the following characteristics; they’ll help you understand how each bond fund is a little different. To learn more about the fund you’re considering, consult the fund’s prospectus.

Investment goals

All bond funds have investment goals, such as income generation or capital preservation. What makes each fund different is the strategy it follows to achieve those goals. For example, some funds invest only in bonds issued by the US government or government agencies, while other funds invest in bonds issued by corporations, cities and towns, or foreign governments. Others may invest in a combination of all or some of these bonds. It’s important to make sure the fund’s goals and its approach align with your financial goals.

3 questions to help you choose a bond fund

1. How long do you intend to keep the money invested?

  • If you have a very short-term time horizon (less than 1 year), you may want to stick with money market funds  or a very short-term, high-quality bond fund that attempts to minimize share price fluctuation.
  • If you have at least a year before you’ll need the money, consider a short-term bond fund. You may enjoy higher yields and total return than you would in a money market fund, but the value of your investment will fluctuate each day based on current market conditions.
  • If you have even more time to ride out the bond market's ups and downs and are willing to do so, you may reap greater rewards with an intermediate- or longer- term bond fund or one with exposure to higher yielding, lower-quality bonds.

2. Are you investing for current income or for long-term growth?

  • If you're investing for current income, a more conservative bond fund, such as an investment-grade short-term bond fund, can provide more share price stability and principal protection.**
  • For long-term growth, a more aggressive bond fund may offer higher total return, though it comes with greater risk. A long-term bond fund or multi-sector bond fund that has a high yield component may be appropriate.

3. How comfortable are you with risk?

  • Not comfortable: If you have a very low tolerance for risk, a money market fund may be most appropriate.
  • Moderately comfortable: If you are willing to invest in a fund that offers a potentially higher return but also comes with the risk of losing money, you may want to consider a high-quality, short- or intermediate-term bond fund.
  • Very comfortable: If you’re looking for the highest possible return and are comfortable that your investment may decline in value, a long-term bond fund or multi-sector bond fund that has a high yield component may be appropriate.

* While short-term bond funds can offer a higher potential yield than money market funds, they also carry more risk.

** Keep in mind that even a more conservative bond fund's yield and share price will change daily based on changes in interest rates and market conditions. The fund's reaction to these developments will be affected by the types and maturities of securities in which the fund invests, the financial condition, industry and economic sector, and geographic location of an issuer, and the fund's level of investment in the securities of that issuer. Unlike individual debt securities, which typically pay principal at maturity, the value of an investment in a bond fund will fluctuate.

Average maturity

A bond fund maintains a dollar-weighted average maturity, which is the average of all the current maturities of the bonds held in the fund. The longer the average maturity, the more sensitive the fund tends to be to changes in interest rates. Funds that focus on bonds with a specific maturity range generally say so in their name: Funds with "short-term" in their name typically invest in bonds that mature in 1 to 3 years; "intermediate-term" funds typically invest in bonds that will mature in 3 to 10 years; "long-term" indicates more than 10 years.


Duration estimates how much a bond's price fluctuates with changes in comparable interest rates. If rates rise 1%, for example, a fund with a 5-year average duration will theoretically lose 5% of its value. Other factors, however, also can influence a bond fund's share price, and the fund’s actual performance may differ.

Credit quality

The overall credit quality of a bond fund will depend on the credit quality of the securities in the portfolio. Bond credit ratings can range from speculative—often referred to as high-yield or junk bonds—to very high, generally referred to as investment-grade bonds. Funds that invest in lower-quality securities can potentially deliver higher yields and returns, but will also likely experience greater volatility, due to the fact that their interest payments and principal are at greater risk.

The relative credit risk of a bond is reflected in ratings assigned by independent rating companies such as Standard & Poor’s, Moody’s and Fitch. These rating companies use a letter scale to indicate their opinion of the relative credit risk of a bond, with the highest credit rating being AAA. Bonds in default are assigned C and D ratings. To learn more about credit ratings and how credit rating companies assign them, see Bond Ratings.


It’s important to look at a fund’s total return over time, not just the most recent quarter or even year. Total return is based on the value of the bonds held by the fund, as well the income distributions generated by those bonds.


A fund’s 30-day yield will provide an indication of that fund’s income-generating potential—but a fund’s yield does not tell the entire story. For instance, some funds generate higher yields by investing in lower-quality securities, which could lead to greater volatility. So investors should not purchase high yield bonds based on potential yield alone. Factor in credit risk, risk of default associated with the issuer, and how that risk might affect the safety of their investment. As with any investment in fixed income products, yields represent past performance and there is no guarantee that they will continue to be paid.

Expenses and fees

As with any business, mutual funds have operating expenses. Funds typically charge a percentage of assets for the cost of managing and distributing the fund; this so-called expense ratio is assessed annually. Other charges, such as sales charges, or loads, are deducted from the amount of each investment. Some funds may charge a redemption fee for shares sold within a certain time period. Some will charge an annual account fee. Make sure you are aware of all expenses before you invest, as those will impact your overall returns.

Fund management

Fixed income investing can be complex, which makes it critical that you look for funds managed by a company committed to providing thorough research and analysis. A summary of each fund’s management team and its qualifications can be found in the prospectus.

Research bonds quickly and easily

Get investment analysis to help you invest in bonds.

More to explore

You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Before investing, always read a money market fund’s prospectus for policies specific to that fund.

Past performance is no guarantee of future results.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

Lower-quality debt securities include all types of debt instruments that have poor protection with respect to the payment of interest and repayment of principal, or may be in default. These securities are often considered to be speculative and involve greater risk of loss or price changes due to changes in the issuer's capacity to pay. The market prices of lower-quality debt securities may fluctuate more than those of higher-quality debt securities and may decline significantly in periods of general economic difficulty, which may follow periods of rising interest rates. 586258.6.1