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A bond fund (also called an
income fund) is a type of mutual fund that invests only in debt obligations. Just as the
value of a bond fluctuates in response to changes in interest rates, so does the value of
bond funds. Generally, a bond fund will have greater fluctuation in value, and greater
potential for producing higher income, the longer its average maturity is.
The three major average maturity groups are:
Short-term bond fund – average maturity of one to five years.
Intermediate-term bond fund – average maturity of 5 to 10 years.
Long-term bond fund – average maturity of more than 10 years.
In addition to maturity levels, bond funds also vary by the type of bond they invest in.
Some common bond fund types that you might see in a 401(k) plan include:
U.S. Treasury Bond Fund. This invests only in U.S. Treasury obligations such as T-Bills
and Treasury bonds.
U.S. Government Bond Fund. This invests in securities issued by the U.S. Treasury
(T-bills, T-bonds) and agencies of the U.S. government (such as issues from the
Export-Import Bank or the Federal National Mortgage Association).
Corporate Bond Fund. This invests in the debt obligations of large U.S. companies.
International Bond Fund. This invests in debt obligations of non-U.S. companies.
You should remember that, as a rule, it is never a good idea to invest in any fund until
you read its prospectus and understand the risks involved. |
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