Frequently Asked Questions About Bond Mutual Funds

How many bond mutual funds are there?
Bond funds are the second most common type of mutual fund, accounting for 2,015 of the more than 7,977 mutual funds as year-end 2005, according to ICI's monthly survey of the U.S. fund industry.

What percentage of total mutual fund assets is held in bond funds?
Approximately 15 percent - or $1.36 trillion - of total mutual fund assets are invested in bond funds. For comparison, stock funds account for 55 percent ($4.94 trillion), and money market funds comprise 23 percent ($2.04 trillion) of mutual fund assets.

Share of Total Mutual Fund Assets by Category

Note: Components may not add to 100 percent because of rounding.

Have bond fund assets changed?
Since the mid-1990s, bond fund assets have grown steadily. In fact, the assets in bond funds have increased 127 percent since year-end 1995, reaching $1.36 trillion as of the end of 2005. A little less than half of this growth is due to the inflows bond funds have experienced during the previous 10 years.

Bond Fund Assets
(billions of dollars)

What are recent bond fund flow trends?
In 2005, net flows to bond funds totaled $31.31 billion. In 2004, bond funds experienced modest net outflows of $11 billion. In 2003, bond funds had an inflow of $32 billion, compared to record inflow of $141 billion in 2002. Bond funds are less appealing to investors when returns are expected to be reduced by rising interest rates. In 2005, taxable bond funds had an inflow of $26 billion, while municipal bond funds experienced an inflow of $5 billion.

How do interest rates affect the flow of new cash into bond funds?
Net cash flows into bond funds are sensitive to movements in market interest rates. Net flows tend to be heaviest during extended periods of declining interest rates and high returns on bond funds. Conversely, negative net flows tend to be associated with rising interest rates and negative or low returns on bond funds. The fluctuation in bond fund flows results more from changes in sales than from changes in redemption rates.

Largest Three-Month Net Outflows During Bond Market Downturns
(shown as a percentage of previous month-end assets)

How big are bond fund holdings relative to the U.S. bond markets?
Bond funds held 18 percent of the $1.9 trillion municipal government debt at the end of the first quarter in 2006. Furthermore, bond funds held 5 percent of the $11 trillion of federal government and agency debt. Bond funds held 5 percent of the $8.6 trillion of corporate and foreign debt.

Why are some bond funds tax-exempt?
Municipal bond funds invest in securities whose interest payments are free from federal income tax and sometimes free from state income tax, as well. However, municipal bond funds may be subject to capital gain taxes.

August 2006