Never Buy a Bond Mutual Fund Thinking it’s a Bond

So many investors, especially those who invest their 401k plans, make this very sneaky mistake. I call it sneaky because financial professionals and the industry as a whole place bond funds in the same asset category as other fixed-income instruments. By definition, all mutual funds are considered equities. Mutual funds, like stocks, have fluctuating daily prices. Because a mutual fund’s daily price changes, its yield also changes on a daily basis. And when interest rates rise, bond prices fall, meaning the price of bond mutual funds will likely fall. Unlike a bond, bond funds do not mature at a certain date, and portfolio turnover may create taxable capital gains where a true bond, held to maturity, will not. If you need to invest in a fixed-income instrument, buy a bond. Don’t ever buy a bond fund thinking you are diversifying into fixed-income assets. A bond fund more closely approximates an income-oriented equity fund than it does a fixed-income asset.