For Some, Bonds Edge Out Bond Fund
Low-cost fund families are attractive for a young person getting started
QBond mutual funds are usually recommended to be part of one's portfolio. Am I am right to be skeptical of this advice? I always thought bonds were for fixed income. Even though bond principal prices change in the marketplace, you can avoid those fluctuations by holding bonds to maturity, never having to take the principal loss or gain, but benefiting from the interest. Shares in bond funds have no final maturity. Therefore, you are always at risk for losing principal. What then is so good about bond funds? They seem to lose their fixed-income characteristics.
- V.J., Minneapolis
AYou're correct that bond funds have no set maturity, says Eleanor Blayney, a consultant at Sullivan, Bruyette, Speros & Blayney in McLean, Va. "Therefore, you may not wish to buy a bond fund" for a cash need at a specific point in the future. But funds can be competitive when comparing total return, not just income.
Investors primarily buy bond funds for two reasons, she says: (1) diversification (a fund spreads risks by owning scores of securities), and (2) professional management, though that means annual fees.
QI'm 24 years old and interested in building a financial plan. I've no experience in stocks or bonds. What is the best way to go about buying into these things without losing money?
- P.J., Joliet, Ill.
AFirst, "make certain that you have enough ... cash set aside" for emergencies - say three-months' expenses - says Maria Crawford Scott, editor of the American Association of Individual Investors Journal. Then "invest on a regular monthly basis in a mutual fund." That cuts the risk of putting all your money in at at a market peak. For more pointers, see the story on Page B6 today.
Two fund families that allow you to invest low monthly payments are T. Rowe Price (800-541-8832) and American Century (800-345-2021).