Expert: Doug Ingram - 1/30/2003

Question
Hello
Thank you first of all for taking my question. I have a general question which I have not been able to find an answer for about bond mutual fund investing.  My question is this:

I know that investing in bond funds, even in the highest quality bond funds, has its own set of risks associated with it,  since the price of the fund moves in the opposite direction of  interest rates. However, in order to minimize the risk of loosing the principal, when investing in bond funds, which strategy is better:  Buying such funds when interest rates or extremely high or buying such funds when rates are extremely low?   

The reason for my question is because I have been thinking about investing in some high quality bond funds lately, however most economists seem to agree that interest rates have no other way to go, but up, since interest rates are the lowest they have been in decades. I thought that the current time may be one of the worst times in recent history to invest in bond funds, especially for someone like me, who wants to minimize the risk of loosing the principal, as much as possible.

I would truly appreciate your opinion.

Thank you very much
Atam  

Answer
Just as there are different stock funds, there are also different bond funds.
Since interest rates are already low, short term funds pay very little, but they have the LEAST risk!
Long term funds pay more. but could stand to lose a lot of NAV if rates rise.
Even though I expect rates to go a little lower, the smart play  is most likely a short term fund or a varible rate fund.
You could go for a medium term fund with a little more risk, but a little more return.
All of these strategies would preserve your capital until stocks find a bottom.

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