What Are the Different Kinds of Bond Funds?

As with stock funds, fund companies have created bond funds tailored to suit many different investment interests and tax brackets. Some concentrate on bonds issued by low-risk borrowers with rock-solid credit to provide a relatively low but steady income. Others take a chance on somewhat shakier issuers (again, junk bond funds come to mind here) and hope that the high yields will make up for any defaults. Some bond funds take a long-term approach, while others will only look at short-term debt. Most bond funds invest in government or corporate bonds; these funds are also called “taxable” bond funds. Some invest only in state and local government bonds (which, remember, are generally not a wise investment for investors in low tax brackets). 

Just as it is essential to consider expenses and fees when investing in stock funds, it’s just as important to do so when evaluating bond funds. The average taxable bond fund charges an expense ratio of 1.1 percent; this can be a very high cost relative to the return you receive, particularly in an environment where interest rates are low. In contrast, the best bond index funds (bond funds that attempt to invest in broad market indices representing all bonds) often charge less than 0.2 percent a year.