Check Bond Fund Holdings

by Alan Lavine and Gail Liberman

Considering a bond mutual fund that invests in high-yield, convertible or asset-backed bonds?

If so, you might want to think twice. Reason: These types of bonds can move in the same direction as stocks. notes Milton Ezrati, economist for Lord Abbett & Co., Jersey City.

So if you do make your investment, you may want to adjust the rest of your holdings accordingly.

Find out what a fund may invest in by reading its prospectus. This legal document should highlight the fund’s investment strategy, fees and risks.  

Some bond funds say they invest in “high quality bonds,” but often they still may invest in other types, Ezrati says.

Meanwhile, before considering any bonds, make sure that you can sleep comfortably with these basic bond characteristics.

• Bond prices and interest rates move in opposite directions. This means that when interest rates rise, bond prices fall. But the shorter the bond’s term, the less volatile. For lower risk, stick with shorter-term bonds or bond mutual funds owning bonds that mature in less than 10 years. Also, look for bonds backed directly by the U.S. Treasury.

• Bonds mature while bond mutual funds do not. This means that you can lose principal with bond funds. Provided that your bond issuer keeps its promise, however, a standalone bond should return your full principal at maturity.

• Bond funds charge management fees that average 1 percent annually, according to Morningstar Inc., Chicago. Plus, they may charge a “load” or commission. There is no ongoing management fee with a bond. However, if you buy a bond from a broker, you may pay price “markups”—both from the broker who sells it to you and on the brokerage firm that sold it to your broker.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.