As the second quarter begins, that scenario is looking unlikely. Lipper Analytical Services Inc. Riskier bond funds, coming off an impressive year, continued to outperform. As the Dow Jones Industrial Average nears the 9000 mark, many investors are examining alternatives, and an increasing number are turning to bond funds. Although the economy is showing signs of strength, and the impact of the Asian crisis may not be as great as some economists anticipated, the Federal Reserve is unlikely to raise interest rates more than once in the next six months, and could stay on hold throughout the year, helping bond prices in the process. Not so fast.
Many investors view bond funds as a safe alternative to stocks.
As a result, you could lose your shirt in a bond fund. In contrast, investors who buy an individual bond and hold it to maturity are guaranteed to get back their investment, assuming the issuer doesn't fail. Morningstar Inc. At the same time, the fees charged on a bond fund will usually eat up a larger chunk of a fund's performance than they will with stocks, because bond funds usually don't have the same upside as stock funds. But bond funds aren't as bad as their critics make them out to be. Just remember that if your principal dwindles, your dividends from the fund's income stream will rise.