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| Style Boxes for Bond Funds |
| Many investors don't realize it, but there are just as many kinds of bonds (if not more) than
stocks. And while many are pretty safe and even boring, bonds come in the risky variety as well. To help you get a handle on the
bond-fund world, Morningstar uses a style-box system similar to the one we use to peg stock funds. |
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| You can use the bond style box in several ways. First, you can compare your fund's performance
with other funds in the same part of the style box to see how it stacks up. Second, the style box can help you when you go to pick
new funds. If you already have a fund from onesection of the style box, you probably won't want to buy another. |
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| Finally, the style box tells you something about a fund's possible risks. As you can see,
funds from the bottom and right of the box are usually riskier than those at the top and left. |
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| At the top of our style box are funds that buy high-quality bonds,
like government bonds or bonds from solid companies. At the bottom are riskier,
low-quality bonds, which have a higher chance of defaulting, or not making their
principal or interest payments. |
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| Funds on the left side of the box own bonds that will be paid back quickly.
Because money in these bonds isn't locked up for long, changes in interest rates don't
affect their price much. Funds on the right buy bonds that have longer maturities, so their
value will rise and fall more as interest rates change. After all, no one wants to be stuck
holding a 6% bond for 30 years if interest rates increase to 9%. |
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