Bond Fund Options for a 401(k)
Original post by Geri Terzo of Demand Media
Incorporating bond funds into a 401k retirement plan can offset some other risks that an investment portfolio may contain from more volatile securities, such as stocks. Not all bonds are conservative investments, however, and adding risk appropriately can enhance a retirement fund's returns. Investors can select bonds with varying durations and from different regions. If a particular bond fund is not performing as expected, an investor can redirect assets into a different bond fund.
A 401k is a defined-contribution structure, and plan members have the responsibility to select individual funds for investment based on options provided by the plan sponsor or the administrator. A bond fund can be a mutual fund managed by an investment professional who makes investment decisions according to a defined strategy. Bonds are a type of debt issued by corporations, governments or municipalities. Investors receive interest payments from the issuer until a maturity date, at which time the face value of the bond is repaid.
High-yield bonds considered risky because of the chance corporate issuers could default on the debt. This assessment is based on a credit grade attached to high-yield bonds by industry ratings agencies. Although these bonds are higher risk, they also deliver attractive returns that typically exceed those inherent in more traditional bond investments. Investors can diversify their bond portfolio by mixing both high-yield and investment-grade bonds.
U.S. government bonds are issued in increments ranging from three months to 30 years. These are among the safest bond investments because the risk that a government will default on debt is usually low, although the U.S. credit rating was downgraded for the first time in 2011. Government bonds are a conservative addition to a 401k plan, and can introduce some safety for investors who are nearing retirement and cannot afford too many risks.
International bond funds are made up of corporate or government debt from other countries. Although investors face uncertainties by gaining exposure to overseas funds, there are certain ways to guard a portfolio from excessive risk. Treasury Inflation-Protected Securities are bond investments designed to hedge against inflation. Exchange-traded funds are a type of mutual fund that are made to perform inline with a certain index or industry barometer. International ETFs that contain TIPS could prevent unwanted price gyrations in an investment fund, according to ETFdb.
- 401k.org: 401(k) Investing in Volatile Times
- Fidelity: Bond Ratings
- The Wall Street Journal; SEC Examines S&P's Math; Jean Eaglesham, et al; August 2011
- Charles Schwab; Seeking Opportunity in High-Yield Bonds; Rob Williams; January 2011
- ETFdb; International Bond ETFs: Cruising Through All The Options; Michael Johnston; July 2011
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.
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