Incorporating Bond Funds Into Your Investment Strategy

Summary: If you are investing for income or want to diversify your portfolio, you may want to consider investing in bond funds.

If you are investing for income or want to diversify your portfolio, you may want to consider investing in bond funds. Bond funds can offer investors many of the same benefits of individual bonds, in addition to the advantages of diversification and professional management, according to "Bond Funds: The T. Rowe Price Investment Guide." Investing in bond funds is different from individual bonds. When you invest in a bond, you lend the issuer money. The issuer then pays you regular interest for the duration of the bond and repays the principal at the bond's maturity date, provided the issuer does not default. A bond fund is a mutual fund that comprises many bonds, with a professional fund manager who buys and sells securities to keep the fund true to its specific investment objective. A bond is a debt security, similar to an IOU. Bonds can serve as an attractive "middle ground" between stability (cash) investments and stocks, offering investors the potential for more meaningful returns than cash investments - with less overall volatility than stocks. An appropriate asset mix is essential to your long-term investment success. Although diversification cannot protect against loss in a declining market or assure a profit, a diversified portfolio should be less volatile than one that's invested in just stocks. That's because the underperformance of one type of investment may be offset by the strong performance of another. Investing in a combination of short, medium and long-term bond funds can help you pursue income while addressing the risk of rising interest rates. This is called laddering. Remember that shorter-term bond funds carry a lower risk and return potential than longer-term funds. That's why a diversified bond portfolio can provide a continuation of income, along with some protection from the impact of rising rates. As an example, a laddered bond portfolio might consist of bonds with one, five and 10-year maturities. Investing in both shorter and longer maturities can help your strategy stay on track during both high and low interest-rate climates. T. Rowe Price offers a variety of 100 percent "no-load" bond funds, meaning the investor does not pay sales charges or commissions.