January 28, 2014
What is the difference between a short term, intermediate term, or long term bond mutual fund? Why is this important to know?
What is the difference between a short term, intermediate term, or long term bond mutual fund? Why is this important to know?
The short term bond mutual fund buys short term bonds, while the intermediate has intermediate bonds in it, while the long term has long term bonds, the length of the bond life in the fund is what decides how volatile fund will be and what your risk and return is.
Well said, Garrett. Let’s review.
When you see short, intermediate or long in the name of a bond fund, it simply shows you the average length of the bonds that are owned in that fund. This average length is called the maturity.
For example, the average maturity of bonds in a short term fund may be 3 years, and may be 5 years in an intermediate fund, and may be 12 years in a long term fund.
Just as Garrett stated, the longer the term, the more volatile the fund. Volatile? The more it gyrates with the fluctuation (and estimated fluctuation) of interest rates. When interest rates go up, bonds go down. The longer the maturities, the more they go down. When interest rates go down, bonds go up. The longer the maturities, the more they go up.
In today’s environment, it is wise to keep your bond funds to the short to intermediate variety. Actually, I would recommend you avoid long term bonds in any type of environment. Look toward stocks when you are looking at periods of 10 years or more.
The Vanguard short-term bond index fund is a wonderful option in todays environment. If you would like to take a bit more risk, consider the total bond market index fund, which is an intermediate bond fund. Both funds should be considered as you put your portfolio of assets together (stocks, bonds, real estate, and cash) reaching for growth, income, and compounding over time. Knowledge is POWER!!!!