Quarterly Review of Mutual Funds: Bond Fund Investors Should Note Price Risk
NEW YORK -- Investors searching for higher yields are pouring billions of dollars into bond funds these days, but they may find it was a costly decision if interest rates turn back up.</br></br>Unlike money-market mutual funds, which maintain a fixed $1-a-share net asset value, bond funds fluctuate in value as interest rates rise and fall. When rates go down, the value goes up; but when rates rise, the value declines.</br></br>But most people investing in bond funds "focus only on yield and don't focus on price risk," says S. Timothy Kochis, a San Francisco financial planner. "They think that when they need their money it'll be there."</br></br>It might not be, at least not all of it -- depending on how sensitive the bonds in a particular fund's portfolio are to interest rate moves.</br></br>For instance, if interest rates rise just one percentage point over the next year, an investor who put $10,000 into a Treasury bond fund yielding 7.7% would be left with $9,820, according to calculations by Vanguard Group.