What Are Intermediate-Term Bond Funds?
An intermediate-bond fund is a bond mutual fund that invests in a basket of intermediate-term bonds—those that mature sometime between short-term and long-term ones. Though definitions vary, they mature in about five to 10 years.
The maturity date is the point at which the bond issuer pays back the principal or face value of the bond. Investors earn interest on the bond during the period until maturity.
Medium Interest Rate Risk
Long-term bonds can last as long as 20 to 40 years, and short-term bonds can last for less than a year or up to five years. Short-term bonds offer less interest rate risk than long-term bonds, but with their relatively low returns, they're often thought of as an alternative to money market funds. (When interest rates rise, the price of an existing bond goes down because investors would get a higher return by buying a new bond that pays higher interest.)
General investment wisdom dictates that short-term bonds are best when rates are headed up, and long-term bonds are best when rates are going down. When interest rates are uncertain, staying in the intermediate term can be a happy medium. That's because you'd take on less interest rate risk than you would with a long-term bond while getting a slightly better return than you might from a short-term bond.
Easier Than Buying Individual Bonds
Mutual funds pool money from many investors and invest it with a specific goal or investment type in mind. They tend to be easier to buy than individual bonds because the fund managers do the research for you. The minimum amount needed to invest is also usually lower.
With a bond fund, you diversify your holdings, and you may be invested in a lot of different types of bonds: government, corporate investment-grade, corporate high-yield, municipals, and so on. That minimizes the risk of default wiping out all of your assets.
Intermediate-term bond funds are no different and will provide you with diversification within that bond fund class.
The Financial Industry Regulatory Authority (FINRA) offers a Fund Analyzer that offers information and analysis on more than 18,000 funds of different types.
Look for Low Fees
As always, fees are the most important factor when choosing a mutual fund. The average domestic bond fund has an expense ratio of just above 1%. You may find a bond index fund that's even less costly.
Most importantly, look for a no-load fund. Loads are additional commissions or expenses that you may pay at the front-end, when you first buy the bond, or on the back-end, once you sell.
It's also important to analyze risk in a bond fund. The various potential risks include the risk of default, country or foreign exchange risk, or too much leverage. (A leveraged fund borrows money to increase the amount it can invest.)
Past performance doesn't matter as much because performance is mainly dictated by interest rate movement, which changes all the time. But you can compare the performance of the fund against a benchmark with site such as Morningstar.
Maintaining a diversified mix of investments from different asset classes is an important element of any investment plan. That is why it is important to monitor your total asset allocation mix across all investment asset classes. Investment decisions should always be made with consideration to your time horizon and risk tolerance.
Asset allocation models from the American Association of Individual Investors provide sample portfolios including intermediate-term bonds.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Vanguard. "Bond Fund Basics: Maturity and Stability." Accessed April 5, 2020.
TreasuryDirect. "Glossary of Terms." Accessed April 5, 2020.
Fidelity. "Duration: Understanding the Relationship Between Bond Prices and Interest Rates." Accessed April 5, 2020.
Investor.gov. "Mutual Funds." Accessed April 5, 2020.
ETF.com. "Importance Of Bond Fund Expense Ratios." Accessed April 5, 2020.
Investor.gov. "No-Load Fund." Accessed April 5, 2020.
Investor.gov. "Mutual Funds, Past Performance." Accessed April 5, 2020.