How is your bond mutual fund doing?
Answering that question isn’t as simple as checking its returns. That is because bond funds increasingly are investing outside of their “benchmarks,” or the indexes against which they compare their results.
When bond funds stray too far from the index, it could signal the manager is taking bigger risks than safety-minded investors might expect.
Bond funds are the most popular category of mutual funds, attracting net inflows of $204 billion so far this year through Aug. 31, compared with net outflows of $59 billion in U.S. stock funds during the same time period, according to investment-research firm Morningstar.
At the same time, bond funds’ “tracking error,” the term Morningstar uses to describe a fund’s divergence from its benchmark, has increased.