August 15, 2013

What is the difference between a short-term bond fund, an intermediate-term bond fund, and a high yield bond fund? Why should you care?

2 thoughts on “August 15, 2013”

  1. Katherine Graham says:

    The main difference between a short-term bond fund, an intermediate-term bond fund, and a high yield bond fund is the level of risk associated with each. A short-term bond index fund is a low risk bond fund, while an intermediate-term bond fund is a moderate risk stock fund. I should care, because knowing a fund’s investment style can help me understand how it might fit in my portfolio. It can also help me build a portfolio that’s broadly diversified across markets.

  2. Mike Finley says:

    Another fine answer, Katherine. Well done! Let’s recap. When looking at bond funds, one must look at the maturities and credit worthiness of the bonds contained in the fund. A short-term bond fund has short maturities (under 5 years), while an intermediate-term bond fund has moderately short maturities (5-10 years). As interest rates go up and down, the bonds contained within those funds are affected. When rates go up, the value of those bonds will go down and when they go down, the value will go up. The longer the maturities, the bigger the affect will be.

    High yield bond funds (junk bonds) deal with credit risk as many of the bonds belong to companies that are sick and may fold. Because of this, they are required to provide a higher return otherwise no one will buy them. In many ways, these type of funds work in unison with stock mutual funds. I recommend you avoid these funds (and long term bond funds) because the risk/reward is out of whack (too much risk for too little reward). If you want higher returns, stick with stock mutual funds.

    Katherine explained the point very well on why you should care. The key point is how a bond fund fits into your portfolio. A portfolio should be built based on your risk tolerance, time horizon, and goals. You can learn more on this subject by going to the savings tab on this website and reading more about the different type of bond funds that are available at a place like Choose the fund(s) that fits YOU.

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