|
Factors in Bond Fund Selection
The Vanguard Group
Volatility
 |
Your Options: Short-term (less than 5 years), intermediate-term (5–10 years), or long-term (more than 10 years) bond fund.
How to Choose: The longer the average maturity and duration of a fund, the more its price may fluctuate—and the higher the interest rate it generally offers (to compensate you for this volatility). The longer your investment time horizon (and the greater your risk tolerance), the more volatility you can withstand.
|
Credit Quality
|
Your Options: Funds with credit ratings ranging from high grade to extremely speculative.
How to Choose: U.S. government bond funds generally are the highest quality, but you must be willing to earn less interest income in exchange for greater peace of mind.
|
Tax Consequences
|
Your Options: Taxable or tax-exempt (municipal) bond funds.
How to Choose: If your tax bracket is high enough, a tax-exempt bond fund held in a taxable account may generate enough tax savings to offset the lower interest rate you are likely to receive. In your tax-deferred accounts (such as individual retirement accounts), you should hold taxable rather than tax-exempt bond funds.
|
Current Income
|
Your Options: Funds ranging from long-term to short-term or low credit quality to high credit quality.
How to Choose: The greater a bond fund's risk (the longer its average maturity and duration, and the lower its credit quality), the higher its interest rate is likely to be, because the market rewards investors for assuming even a small amount of additional risk.
|
Management Strategy
|
Your Options: Actively managed or passively managed (index) funds.
How to Choose: Actively managed funds offer the potential to substantially outpace the market—but they could underperform the market instead. Index funds seek to match the market; their buy-and-hold strategy offers cost and tax advantages, and many market indexes have outperformed comparable actively managed funds over time.
|
Learn more about The Vanguard Group
|
|
