Interest Rates on the Rise
Mutual funds that hold long-term bonds may be the most susceptible to rising interest rates since prices may head lower as interest rates rise. For instance, the highly rated Vanguard Long-term Corporate Bond Index Admiral Shares (VLTCX) has fallen 3.13% so far this year after gaining 16.72% in 2014, due to the prospects of rising interest rates. The fund may experience further declines if interest rates continue to rise at a higher-than-expected pace.
Short-term bond and high-yield (junk) bond mutual funds tend to perform slightly better as investors shift assets from long-term, low-yield bonds into these instruments. While they are adversely affected by rising rates, the fund flows can help increase demand and offset the price declines seen in other fixed-income asset classes. Municipal bond mutual funds may also experience less of a decline given their tax-advantaged nature.
Here are some mutual funds to consider in these areas:
The Bottom Line
Sign up for Advisor Access
Receive email updates about best performers, news, CE accredited webcasts and more.