Every fund’s prospectus outlines important information that can help you find the fund that may be right for you. The characteristics explained below are important factors that can help you evaluate your bond fund investment. Prospectuses for both Fidelity funds and FundsNetwork funds can be found in Products > Mutual Funds. Or use the Fund Evaluator to find a fund that meets your criteria.
Investment Goals
Bond funds have specific investment goals, such as pursuing high income or preservation of capital. Bond funds may follow different investment guidelines in order to pursue those goals. For example, some funds may limit their investments to U.S. government and government agency investments while other funds may invest in different bond sectors including corporate, government, government agency, and mortgage-backed bonds. The prospectus will state the fund's goals and investment guidelines.
Average Maturity
A bond fund maintains a dollar-weighted average maturity, which is the average of all the current maturities of the individual bonds in the fund. The longer the average maturity, the more sensitive the fund will be to changes in interest rates. Funds with "short-term," "intermediate-term," or "long-term" in their names indicate the average maturity the fund targets.
Duration
Duration estimates how much a bond's price fluctuates with changes in comparable interest rates. If rates rise 1.00%, for example, a fund with a 5-year duration is likely to lose about 5.00% of its value. Other factors also can influence a bond fund's performance and share price. A bond fund's actual performance may differ.
Credit Quality
The average credit quality of a bond fund will depend on the credit quality of the underlying securities in the portfolio. Bond credit ratings can range from speculative to very high credit quality. Bonds rated medium to high credit quality are commonly referred to as “investment grade-quality.” Bonds rated below investment grade-quality are commonly called “high yield” bonds or “junk” bonds. Funds that invest in lower-quality securities have the potential for higher yields and returns, but will also likely experience greater share price volatility.
The credit quality of a bond is reflected in ratings assigned by independent rating companies such as Standard & Poor’s and Moody’s. These rating companies use a letter scale to indicate credit quality, with the highest credit quality being AAA. Bonds in default are assigned C and D ratings. This rating system can give investors important information on the creditworthiness of a bond.
Performance
It’s important to look at a fund’s total return over time. Total return takes into account the value (or price) of the underlying bonds held by the fund in addition to income distributions from those bonds. Investors interested in income may want to look at the fund’s 30-day yield. However, keep in mind that yield by itself does not tell the entire story. Higher yields usually come with strings attached. For example, the fund may achieve higher yields through investments in lower-quality securities, which may make the share price (or value) of your bond fund investment more volatile.
Expenses and fees
All mutual funds have operating expenses that include the costs of managing a fund. Some bond funds have sales charges, or loads, that are deducted from the amount of your initial investment. Some funds may charge a redemption fee for shares sold within a certain time period. Others may charge a small annual account fee. Make sure you are aware of all expenses before you invest.
Fund Management
Bond markets today are more complex than they were just a few years ago. In selecting a mutual fund company for your bond fund investments, make sure the company is committed to providing the research and analysis that bond fund management now requires.
From Fidelity.com
