When you buy shares in a bond fund, the manager pools your money with money from other investors and buys bonds for the fund's portfolio. The price you pay is the
net asset value (NAV),
computed by dividing the total value of the bonds in the fund by the number of existing shares, plus whatever sales charge may apply. Some, but not all, funds impose these charges.
At the same time that your money is being invested, the manager authorizes the sale of bonds in the portfolio to take advantage of changes in the marketplace. Because the fund isn't holding the bonds it buys to
maturity,
its value fluctuates all the time. If you sold your shares when the fund value represented by the NAV was lower than it was at the time you bought, you'd sell at a loss.
In addition, bond funds — like all
mutual funds
— charge annual management fees. You should evaluate these costs as part of the process of choosing a bond fund.
Alexandra Lebenthal, President and Chief
Executive Officer of
Alexandra &
James, Inc.
Alexandra Lebenthal, President and Chief
