Chapter Five How to Select a Bond Mutual Fund Attention Must Be Paid

The growth of bond mutual funds is one of the most remarkable aspects of the soaring popularity of mutual funds. Bond fund assets have grown from just $4 billion in 1970, representing 9% of total mutual fund assets, to $510 billion at the end of 1992, representing 32% of total fund assets. This increase represents a compound growth rate of +25% annually. In contrast, equity fund assets have expanded at a rate of just +12% annually over the same period—less than half of the bond fund growth rate. To borrow a line from Death of a Salesman, “attention must be paid'' to bond funds. This chapter will pay precisely that attention, beginning with a brief overview of the different types of bond funds available. Then I shall discuss the structural investment characteristics (especially quality, maturity, and cost) of bond funds. Finally, I will propose a remarkably simple framework for selecting a particular bond mutual fund for inclusion in your investment portfolio.

It is paradoxical that, considering the enormous amount of attention newspapers and magazines give to equity mutual funds and their portfolio managers, the types of stock funds are by no means as diverse as those of bond funds. As we saw in Chapter 4, stock funds largely comprise some combination of five major investment sectors: growth, value, equity income, broad-based specialty, and concentrated specialty. But bond funds have two levels of comparison. ...

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