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Our Picks

The Best Bond Funds

Here are our highest-rated mutual funds and ETFs across a series of Morningstar’s fixed-income categories.

Too many things in life that should be easy, aren’t. Opening medicine bottles with “child safety” caps, for instance. Detaching toys from their vise-like packaging on Christmas morning. Getting teenage boys to do their laundry (or maybe that’s just my teenage boys).

Choosing a bond fund should be on that list, too.

Investors rely on bonds for many reasons: funding short-term goals, providing ballast to an equity-heavy portfolio, or generating much-needed income during retirement, to name a few. Yet the dizzying array of bond-fund choices can drive an investor to just stick with what he or she may already be familiar with--cash.

But that could be a mistake. As Morningstar director of personal finance Christine Benz noted in a recent article, bonds generally keep up with inflation better than cash instruments do--and bonds can outperform cash over longer periods of time, too.

Before getting down to choosing a bond fund, step back and consider why you need one--what role is it playing for you? Once you know what need it’s filling, figure out whether a taxable-bond fund or municipal bond fund is a better choice for you. If you’re investing via a tax-deferred account like an IRA or 401(k), a taxable-bond fund will be the better match; find out what you should consider before choosing one here. If you’re investing in a taxable account, however, municipal bonds might be the better choice on an after-tax basis. This article can help you determine whether there’s a tax advantage if you take the muni-bond route.

Once you’ve decided on some of the big issues that these articles raise--taxes, duration, and credit quality among them--you can begin the search for a fund that meets your needs.

We suggest that you begin your quest with Morningstar Medalist Funds. These funds are those that we think are most likely to outperform over a full market cycle thanks to their competitive advantages such as low costs and solid processes.

These bond funds all earn our highest rating--a Morningstar Fund Analyst Rating of Gold--as of this writing. They’re great starting points for your research.

Premium Members can use our Premium Fund Screener tool to find other highly rated bond funds.