How To Find The Best Bond Funds

With the right knowledge and common sense, you can use my method to find the best bond funds to invest in and make money.

The most important thing to consider is the type of bonds your fund is investing in. The type of bonds and credit ratings in your fund's portfolio should give you an indication of how much risk and return to expect from your fund.

Bond funds usually invest 80-90% of the portfolio in a specific type of bond, which makes them easier to evaluate than stock funds. Pick a bond category, and try to target 3-5 funds in each category that fit these criteria.

When you find a bond fund, there are five different criteria you should evaluate (in order of importance):

1. Low standard deviation.
2. Low duration.
3. Low expense ratio.
4. Low turnover.
5. Low beta.

Are you seeing a pattern here? The lower, the better. These statistics measure risk and expenses, which are two things you want to minimize when investing in bonds.

Once you find a few funds with low measurements for these five criteria, you should evaluate historical returns and current yield. It's not rocket science to find out which funds are performing well. Look for good, consistent long-term total returns and a reasonable yield for the type of bond you are investing in.

You can use these criteria to help you find the best bond funds, but always remember to keep it simple. Only invest in funds that work with your investment plan.

The Best Bond Funds

Not all mutual funds are created equal. This list is designed to illustrate how I evaluate bond funds, so you can find the bond funds that fit your own investment strategy.

Here are some of the best bond funds I have found using my own investment strategy.

USSTX - USAA Tax Exempt Short-Term

One great alternative to bank CD's and money markets is the USAA Tax Exempt Short-Term mutual fund. Most investors use this type of fund as a tax-free alternative to a CD or savings account, and so far investors in this fund have not been disappointed.

SDIFX - Dreyfus/Standish International Fixed Income Fund

The Dreyfus/Standish International Fixed Income fund has the flexibility to invest in bonds of any country around the globe, and in any currency. That much flexibility allows the managers to look for the best bond bargains around the world. So far, that strategy has given the fund and investors a record of success.

SDIFX - Dreyfus/Standish International Fixed Income Fund

VFIIX - Vanguard GNMA

Vanguard GNMA invests in government-backed mortgage securities, which are very high-quality mortgage bonds. Many government bond funds can boast great returns, but few have delivered great returns while keeping risks and expenses low.

VFIIX aims to deliver great returns by keeping investment costs very low, and it absolutely succeeds.

Caveat: Do NOT take these selections as a personal recommendation from me. You should take your money seriously.

These funds may or may not be appropriate for you, so it's up to you to decide.

Always read the fund's investment prospectus. You may also want to speak with your financial advisor before investing.

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