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Minimizing bonds' risks
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December 4, 1996: 12:50 p.m. ET
'Laddered Treasury' funds can safeguard principal
From Correspondent William S. Rukeyser
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NEW YORK (CNNfn) - With U.S. stock prices so high, some nervous mutual-fund investors are putting money into bond funds.
But these funds can spring nasty surprises on investors.
Like bonds themselves, bond funds' prices fluctuate with interest rates.
But unlike bonds, bond mutual funds don't guarantee they'll return at least your original investment.
What can a cautious investor do?
New types of bond funds -- ones that tell you up front exactly when they'll return bond principal -- are growing in popularity.
"Kind of a novel idea, isn't it -- getting your principal back?" quipped Stan Craig of Merrill Lynch Defined Funds. "But we think it's one that makes a lot of sense."
Merrill Lynch and other firms offer so-called "defined-asset funds" like "laddered Treasury funds" -- packages of U.S. Treasury securities that mature in each of the next five years.
With such a portfolio, you're guaranteed that the fund will get back one-fifth of its principal each year -- in other words, 100 percent over five years.
That means that while the fund isn't risk free, risks can be very low.
At the same time, laddered Treasury funds pay monthly interest that generally runs higher than money-market funds.
And since the funds only invest in U.S. Treasuries, your gains are by law exempt from state and local taxes.
Craig said the fund "is really for the saver." (WAV, 142K) or (AIFF, 142K)
Merrill Lynch's laddered fund has management fees that total less than 0.5 percent annually over five years, and you can get in for as little as $250.
By contrast, you'd need $20,000 or more to set up your own portfolio of laddered Treasury securities.
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