Bond mutual funds are a type of investment vehicle that pools funds from multiple investors to purchase a variety of fixed income securities, such as government or corporate bonds. These funds offer investors the opportunity to diversify their portfolio and potentially earn a steady stream of income through interest payments. In this article, we will take a closer look at the bond mutual fund industry, its benefits and risks, and the alternatives investors should consider.
Understanding Bond Mutual Funds
Bond mutual funds are managed by professional fund managers who are responsible for selecting and purchasing a variety of bonds that match the fund’s investment objective. Bond mutual funds can be classified by the type of bonds they invest in, such as corporate bonds, government bonds, or municipal bonds, as well as their maturity, credit rating, and duration. Investors can choose from a variety of bond mutual funds depending on their investment objectives, risk tolerance, and time horizon.
Get investment guidance from trusted portfolio managers with no management fees. Enroll in Action Alerts MORE now.
Best Bond Mutual Funds to Buy as of 09/30/23
TheStreet Ratings’ mutual fund rating model collects and examines financial data monthly to measure a mutual fund’s risk-adjusted performance compared to its competitors. These 20 bond mutual funds rank highest according to TheStreet Ratings methodology.
Fund name, symbol, overall rating (risk level)
- abrdn Ultra Short Municipal In A (ATOAX) – Get a free report A+ (A+)
- Victory Ultra Short-Term Bond Fund (NEWOX) – Get a free report A+ (B+)
- Pioneer Multi Active Ultrasht Inc A (MAFRX) – Get a free report A+ (B+)
- High Performance RiverPark Sht Tm Rtl (RPHYX) – Get a free report A+ (B+)
- SEI Inst Mgd Tr Tax Fr Consv F (TFCAX) – Get a free report A+ (A+)
- Destinations Low Duration Fxd Inc Z (DLDZX) – Get a free report A+ (B+)
- Opportunistic entry A (ENIAX) – Get a free report A+(B)
- Fidelity Flex Conservative Inc Bonus (FJTDX) – Get a free report A+ (B+)
- DWS ESG Capital Liquidity Fund ESIXX A+ (B+)
- SEI Asset Alloc Def Strat All F (STDAX) – Get a free report A+ (B+)
- Payden Limited Maturity Investor (PYLMX) – Get a free report A+ (B+)
- MSIF Ultra Short Inc A (MUAIX) – Get a free report A+ (B+)
- Conservative Income Fidelity Bonus (FCNVX) – Get a free report A+ (B+)
- CrossingBridge Low Dur High Performance Inst (CBLDX) – Get a free report A+(B)
- Aristotle Ultra Short Income I-2 (PLUDX) – Get a free report A+ (B+)
- BBH Limited Duration Class N (BBBMX) – Get a free report A+ (B+)
- Calvert Ultra Short Duration Inc A (CULAX) – Get a free report A (B+)
- Medalist partners Sht Duration Inv (SEMRX) – Get a free report A (B)
- Voya Govt Money Market Port I IVMXX A (A)
- Putnam Ultra Short Duration Inc A (PSDTX) – Get a free report A (B+)
Advantages of investing in bond mutual funds
- Diversification: Bond mutual funds provide investors with a valuable tool to diversify their investment portfolio. By pooling funds from multiple investors, these funds can invest in a wide range of bonds from various sectors, maturities and credit ratings. This diversification helps reduce the impact of any individual bond’s performance on the overall portfolio, spreading risk and potentially improving returns.
- Professional Management: Bond mutual funds are managed by experienced professionals who specialize in fixed income investments. These fund managers have the experience and resources to conduct extensive research, analyze creditworthiness, and identify promising bond opportunities. Their knowledge and skills can help investors navigate the complex bond market, saving them time and effort when performing individual bond analysis and selections.
- Liquidity and convenience: Unlike individual bonds, which may have limited liquidity, bond mutual funds can be easily bought or sold on an exchange at any time during market hours. This gives investors the flexibility to access their investment quickly, making it a convenient option for those who require liquidity or have shorter investment horizons.
- Income Stream: Bond mutual funds can provide investors with a steady income stream. Bonds typically pay periodic interest payments to their holders, and bond mutual funds distribute these interest payments to their investors as regular income. This can be especially attractive to investors looking for steady cash flow or those who rely on investment income to meet their financial needs.
Risks of investing in bond mutual funds
While bond mutual funds are generally considered less risky than investments in individual bonds, they are still subject to interest rate, credit, and inflation risks. Interest rate risk is the possibility that rising interest rates will cause the value of the bond mutual fund to decrease. Credit risk is the possibility that the bond issuer will default on its payments, while inflation risk is the possibility that inflation will erode the purchasing power of the bond mutual fund’s income.
Alternatives to investing in bond mutual funds
Investors exploring alternatives to bond mutual funds have many other options to consider. An alternative is stock funds, which provide exposure to stocks and can offer capital appreciation potential. Another option is asset allocation funds, which diversify investments across different asset classes, including stocks, bonds, and cash equivalents, with the goal of balancing risk and reward. Additionally, value mutual funds can be an alternative option as they focus on undervalued stocks with long-term growth potential. Each of these alternatives offers different investment strategies and risk profiles to align with investors’ specific objectives and preferences.
The bottom line
Bond mutual funds provide investors with diversification, professional management, liquidity, and an income stream. While they offer advantages over individual bond investments, they are not without risks. Alternatives to bond mutual funds include stock funds, asset allocation funds, and value mutual funds, each of which offer unique investment strategies and risk profiles for investors to consider.
Action Alerts PLUS offers expert portfolio guidance to help you make informed investment decisions.
