Bond Mutual Funds

This chapter reviews open- and closed-end bond mutual funds. It discusses the unique challenges faced by managers of bond mutual funds. The chapter presents a comprehensive literature review on performance evaluation of bond mutual funds and also discusses various segments of the bond mutual fund market. Finally, it includes guidelines that can be useful to investors and investment managers for analyzing fixed income funds catering to a particular segment of the bond market. Most of the evidence suggests that given the largely homogeneous nature of the bond market, consistently generating risk-adjusted returns over benchmark returns (alpha) is difficult for actively managed bond mutual funds. Empirical evidence supports investment in passively managed bond mutual funds given the nature of the bond market and the challenges in consistently generating alpha. However, given liquidity and transaction inefficiencies, difficulties remain in indexing bond portfolios to broad-based fixed income indexes.