Are bond funds part of your retirement portfolio?

A lasting stream of income during retirement is crucial for any retirement plan. To help that purpose, bond mutual funds are one of the great options. The total return on Income-producing investments is something that a long-term bond mutual fund would provide. They are also great tools for stable income production.

As for the steady stream of income, each bond in the fund makes interest payments to the fund. Based on the total market value of the fund and then divided by the total number of outstanding shares, the bond mutual funds pay dividends to investors. In fact, bond funds may make monthly or quarterly dividend payments.

On the other hand, it is argued that these do not come with high returns. However, while there are arguments against holding bond funds in a retirement portfolio, not many would disagree about the importance of diversifying a portfolio. For the purpose of safety, the stream of income and a cushion against volatility, holding a decent share of bond mutual funds over the long term for retirement portfolio is always a prudent move.

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Low rate environment has been helping fixed-income investors over the past many years. However, rates are forecasted to move up this year. Nonetheless, short-duration bond mutual funds are the options this time, as they are less prone to be affected by higher rates.

Also, people looking for a tax advantage may invest in Muni Bond Funds. Interest income exempt from federal income tax is among the many distinct advantages that municipal bonds offer to investors. Then again, U.S. government bonds funds usually invest in Treasury bills, notes and securities issued by government agencies.

So, investors would also get the option of investing from several categories of bond mutual funds, picking the one that best serves their purpose. To round it off, mutual funds investing in debt securities are among the most secure investment options which provide regular income while protecting capital invested. Funds which are part of this category bring a great deal of stability to portfolios with a large proportion of equity, while providing dividends more frequently than individual bonds.

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Best Bond Funds for Retirement Portfolio

Here we will pick bond mutual funds from varied categories. The funds have relatively low expense ratio and carry no sales load. Also, they have decent yields and relatively high returns over the past 1 and 3-year periods. The maximum initial investment is within $5000.

Government Bond Mutual Funds: They are considered to be the safest in the bond fund category and are ideal options for the risk-averse investor. About 90% of the bond holdings are backed by U.S. government or by government agencies, thus minimizing the credit risk.

Government Long-Term Bond Mutual Funds – Generally the effective maturities duration is more than 6 years. If duration is not mentioned, then it can be more than 10 years. However, these funds are rate sensitive.

Fidelity Spartan Long-Term Treasury Bond Index (FLBIX):

invests a major portion of its assets in securities which are part of the Barclays Capital U.S. Long Treasury Bond index. The dollar-weighted average maturity period of the portfolio is at least 10 years or more.

The fund has a yield of 2.67%. Total return over the last 1 and 3-year periods stand at 22.8% and 7.8%. The fund carries an expense ratio of 0.20% as compared to category average of 0.67%.

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Government Short-Term Bond Mutual Funds – Generally the effective maturities duration is within 1 and 3.5 years. If duration is not mentioned, then it can be between 1 and 4 years. These funds are less sensitive to rate changes. 

Lord Abbett Short Duration Income F (LDLFX):

Seeks high income along with capital.  It mostly invests in various short duration debt (or fixed income) securities. A minimum of 65% of its assets is invested in mortgage-backed and other asset-backed securities; and securities issued or guaranteed by the U.S. government and its agencies, investment grade debt securities, and dollar-denominated corporate debt securities among others.

The fund has a yield of 3.73%. Total return over the last 1 and 3-year periods stand at 2.1% and 3%. The fund carries an expense ratio of 0.49% as compared to category average of 0.82%.

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Diversified Bond Mutual Funds: Diversified bond funds provide investors with a convenient and affordable option to hold a portfolio of bonds from different economic sectors. The costs incurred to create a portfolio of individual bonds would be significantly higher than investing in this class of funds. The associated risk also undergoes a decline since volatility in a specific sector has only a partial effect on the fund’s fortunes. The opportunity to reinvest the income generated and a relatively higher level of liquidity also make them secure and attractive investments.

PIMCO Income D (PONDX):

Aims to maximize current income and long-term capital growth is the secondary objective. A minimum of 65% of its assets is invested in a multi-sector portfolio of fixed income securities. These securities have various maturities. The fund may invest a maximum of 50% of its assets in high yield securities. They may be rated below investment grade, but will carry at least a Caa rating by Moody’s or equally rated by Fitch and S&P.

The fund has a yield of 5.31%. Total return over the last 1 and 3-year periods stand at 5.9% and 9.7%. The fund carries an expense ratio of 0.77% as compared to category average of 1.03%.

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Municipal Bond Mutual Funds: Interest income exempt from federal income tax is among the many distinct advantages that municipal bonds offer to investors. They offer relatively high yields at lower levels of risk and are considered second only to government securities in terms of safety of capital invested.

Oppenheimer Rochester High Yield Municipal Y (ORNYX):

Seeks income that is tax free. The fund mostly invests most of its assets in municipal securities that provide tax-free income. Income from these funds may be exempted from regular federal individual or the fund's state income tax.

The fund has a yield of 6.59%. Total return over the last 1 and 3-year periods stand at 10.3% and 7%. The fund carries an expense ratio of 0.56% as compared to category average of 0.99%.

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