Determine Your Fixed Income Fund Allocation

Before you choose to invest in bond funds, it is important to decide the role they will play in your portfolio. Your fixed income allocation should reflect your investment time horizon; your specific investment goals, which may include retirement, retirement income, or tax-free income; and your tolerance for risk.

chart Our chart on Investing in Bond Funds by Time Horizon can help you determine an appropriate allocation for bond funds while recommending allocation levels for investment-grade, high yield, and international bonds to help you meet the needs of your individual investment time line. Or visit our Fixed Income Center to see what allocations we suggest for your portfolio.

Investing in several bond funds with different investment strategies can help cushion the effects of interest rate risk and credit risk on your overall portfolio. For example, investing in both shorter- and longer-term maturities can help your strategy stay on track during both high and low interest rate climates. This also can be achieved by investing in a diversified single-fund option like the Spectrum Income Fund.

U.S. Treasury Bond Funds

These funds invest in Treasury bills, Treasury notes, and Treasury bonds issued by the federal government, with varying maturities:

  • Treasury bills or "T-bills" have maturities of 13 weeks, 26 weeks, or one year
  • Treasury notes mature in two to 10 years
  • Treasury bonds mature in 10 years or longer

They are high-quality, relatively safe investments with almost no risk of default. Treasury securities are backed by the full faith and credit of the U.S. government. Although the securities in which the funds invest are backed by the U.S. government, the funds themselves are not. Yield and share price will vary. Bond funds of this type are also subject to interest rate risk, the degree of which depends on the maturity. (Longer-term bonds have a higher risk/return potential.)

Who should invest? Investors with a low risk tolerance or those who seek to balance a higher-risk portfolio with securities backed by the credit of the government.

Tax-Free Bond Funds

Municipal bond funds offer income that is exempt from federal taxes. In addition, certain state-specific municipal bond funds can provide income free of state and local taxes to state residents. Tax-free bonds typically offer lower yields than comparable bond funds, but, in many cases, this is more than offset by tax savings, resulting in higher after-tax income.

(Some income may be subject to the federal alternative minimum tax.)

Who should invest? Investors in a higher tax bracket or those who live in high-tax states should consider tax-free bond funds.

Corporate Bond Funds

Corporate bond funds invest in bonds issued by corporations. The funds' risk/return potential can vary according to term length and credit rating. Some corporate bond funds invest in bonds that are below investment grade and pose higher risk but offer higher return potential than other funds concentrating on investment-grade corporate bonds.

Who should invest? Investors who can withstand more price fluctuations with the prospect of higher returns compared with U.S. Treasury funds. Depending on the fund’s risk/return potential, corporate bond funds can be appropriate for any portfolio.

Mortgage-Backed Securities Funds

These funds invest primarily in certificates, such as those issued by the Government National Mortgage Association (GNMA, or Ginnie Mae), that represent a pool of mortgages. They also may invest in securities issued by other government-sponsored enterprises. Mortgage-backed securities tend to have high credit quality; in fact, GNMA guarantees the timely payment of interest and principal on its securities—a guarantee backed by the U.S. Treasury. However, mortgage-backed securities also carry market, credit, maturity, and prepayment risks.

Who should invest? Investors seeking higher income than is provided by Treasury securities of comparable maturity and who can tolerate greater risk should consider mortgage-backed securities funds.

International and Global Bond Funds

Investors can use international or global bonds to diversify their bond allocation in their overall portfolio. International bond funds invest in bonds issued by countries or corporations outside the U.S., while global funds may also include U.S. issuers. These funds are subject to special risks that are typical of international investing, such as currency fluctuations and political and economic changes. Bond investments from emerging markets are particularly volatile.

Who should invest? Investors seeking further diversification opportunities and higher potential returns should consider the advantages of global and international bond funds.

Blended Bond Funds

Investors who do not wish to pick and choose a selection of bond funds can invest in a diverse range of bond funds with one selection, as in the Spectrum Income Fund. Single-fund options may combine short- and long-term bonds, domestic and foreign bonds, and different credit ratings to maximize potential earnings while addressing risk.

Who should invest? Investors who want convenience and broad exposure across the spectrum of bond fund options should consider a single-fund solution.

More Bond Fund Information