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Bond mutual funds can be actively managed or
indexed, open-end, closed end or exchange traded funds. For more details,
see the information below.
Actively managed bond funds
As their names suggest, have managers who buy and sell bonds in pursuit of
their investment objective. They sometimes sell bonds at a profit, creating
a capital gain, or at a loss if they need cash to pay shareholders who want
to sell their shares.
Index bond funds
Are not actively managed but constructed to match the composition of a given
bond index, such as the Lehman 10-year Bond Index. When the index changes,
the portfolio changes automatically.
Sponsors of open-end bond funds (usually a mutual fund company)
Offer new shares and redeem existing shares continuously, requiring their
managers to invest cash coming into the fund and liquidate positions when
they need cash to meet redemptions. Investors in open end funds have the
choice to collect their interest income and capital gains or reinvest them
automatically in new funds shares.
Closed-end bond funds
Have a fixed number of shares that trade on exchanges similar to stocks at a
price that may be above or below net asset value depending on supply and
demand. Closed-end bond funds can be indexed or actively managed. To buy or
sell shares in a closed end fund, you have to go through a broker and pay a
commission.
Exchange traded funds (ETFs)
Represent shares in a ?basket? of bonds that mirrors an index, but the
number of shares is not fixed. ETFs trade on an exchange, with shares bought
and sold through brokers who charge commissions.
Unit investment trusts
Are a portfolio of bonds held in a trust that sells a fixed number of
shares. On the trusts? maturity date, the portfolio is liquidated and the
proceeds returned to unit holders on a pro rata basis. UITs are usually
created by brokerage firms that maintain a limited secondary market for the
units. Unit holders who want to sell before maturity may have to accept less
than they paid.
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