You’ll want to hold the best bond fund investment in 2014, 2015 and beyond, and there are three factors to consider in your search for a relatively safe bond fund investment. Be careful, because what might look like the best fund and a safe investment at a glance may be fraught with risk.
Think INCOME FUND, because that’s what they are commonly called and that’s why investors invest money in these funds: to earn a higher interest income (in the form of dividends). Naturally, it might appear that the best bond fund investment would be the one that is of the highest quality and pays relatively high interest income (dividends). Be careful, especially in 2014, 2015 and beyond. What might appear to be to be a good safe bond fund investment could disappoint you.
An income fund manages a portfolio of debt securities (bond issues). Each of these pays a set interest rate, until it matures on a given date. Upon maturity the owner (think fund) receives the face value (usually $1000 per bond) and interest payments stop. The fund then reinvests this money in other bond issues; and pays investors dividends from interest earned in the portfolio on an ongoing basis. For over 30 years people viewed income funds as a good safe investment. Forget about safe in 2014, 2015 and beyond and focus on owning the best bond fund investment in terms of both dividend yield and risk.
I said there were three factors to consider. The first is the QUALITY of the debt securities held in the fund portfolio. The second is the average TIME TO MATURITY for the securities in the portfolio. Some income funds manage a portfolio of the highest quality debt securities in the world: U.S. Treasury securities like the 10 year T-note and 30 year T-bond. These are funds of the highest quality, but are they the best bond fund investment for 2014 and beyond?
When you go with highest quality you accept lower interest (dividend) income. You can increase your income in two different ways: go with a fund that holds lower quality securities, or one with a longer average maturity. In early 2014, the highest quality intermediate-term funds offered a dividend yield of about 2% with an average maturity of 7 to 10 years. You could up that dividend to about 3% if you went with a long term version holding issues that mature in 20 years (on average) or more. Which would be the best bond fund investment, and would either be a safe investment?
The best income fund should pay more than 2%, and no income fund is really a safe investment. In fact, there is no safe bond fund investment for 2014, 2015 and beyond. Going with a long term fund to pick up an extra 1% in dividends is a risky proposition. The big risk today is interest rate risk: when interest rates go up all bond prices (values) fall. Intermediate term funds lose money, and the long term ones lose money BIG TIME. A short term fund is a relatively safe bond fund, but you’ll be lucky to earn 1% in dividends.
That’s the way it works. So, stay away from long term funds in your search for the best bond fund investment. The risk is just too high. Instead, sacrifice a bit of quality and go intermediate term, with an average maturity of about 7 or 8 years (or less). The best fund will hold medium to high quality corporate bond issues and pay a dividend of about 3%. Remember, in 2014, 2015 and beyond the real issue is interest rate risk – not quality.
The third issue to consider is the cost of investing. Why pay a sales charge of 3% or so upfront and give up 1% a year to heavy fund expenses in an attempt to make less than 3% in dividend income per year? The best bond fund investment for your money is a no-load (no sales charges) fund with yearly expenses of less than one-half of 1%: an index fund.
There really is no safe bond fund investment for 2014, 2015 and beyond; but there is a best bond fund investment. Consider a no-load, intermediate term, medium to high quality bond index fund. It’s not really a safe investment, but it’s the best fund for your money.