From the October 2002 issue of Entrepreneur

If you thought bond funds and fixed-income investing were just for old fogies, think again. In tumultuous markets, there's nothing sweeter than their plus-side returns.

Bond funds go in and out of favor. When the stock market is in the tank, their positive returns can balance out the market's negative ones. But when equities are soaring, bonds are too boring for most to consider.

Not without risks, these fixed-income securities come in two basic forms: taxable bond funds, designed for most everyone, and tax-free funds, suited for those in higher tax brackets. Within each category are a host of choices, from funds that invest in Treasury securities to those that invest in junk bonds and municipal bond funds that invest nationally or only in state-specific tax-free bonds. Most, except zero-coupon bonds, provide interest-bearing returns.

When it comes to risk, one of the biggest is interest rates-when rates fall, your fund's net asset value (NAV), or the price per share you paid for it, is likely to climb. On the other hand, when rates start to climb, odds are your fund's NAV will fall.

There's much more to bond fund investing than this column can address. But one important thing is to chose a fund that keeps its annual expenses low. Three fund families known for low expenses are TIAA-CREF, T.Rowe Price and Vanguard.


Dian Vujovich is an author, syndicated columnist and publisher of mutual fund investing site www.fundfreebies.com.