The fixed-income style box is a nine-square box that gives you a visual snapshot of a funds credit quality and duration. The style box allows investors to quickly gauge the risk exposure of their bond fund.

The horizontal axis of the fixed-income style box displays a funds interest-rate sensitivity, as measured by the average duration of all the bonds in its portfolio. Morningstar breaks interest-rate sensitivity into three groups: limited, moderate, and extensive. In previous lessons, we explained that short-term (or limited) bond funds are the least affected by interest-rate movements and thus the least volatile; long-term (extensive) funds are the most volatile. Morningstar divides funds into these buckets based on their duration relative to the 3 year effective duration of our core bond index.

The vertical axis of the style box measures credit quality and is also broken into three groups: high, medium, and low. A funds placement is determined by the average credit quality of all the bonds in its portfolio, and also adjusts for the fact that default rates increase more rapidly between lower grades than higher grades. Funds with high credit qualities tend to own either U.S. Treasury bonds or corporate bonds whose credit quality is just slightly below that of Treasuries. On the other hand, funds with low credit quality own a lot of high-yield, or junk, bonds. Medium-quality funds fall between the two extremes.

The style box can make it far easier for investors to find appropriate funds. Say you need a fund that carries only slightly more risk than a money market fund. Just look for funds that fall within the short-term, high-quality square of the style box. Or perhaps you want a rich income stream but arent comfortable buying junk bonds. A fund that falls within the long-term, medium-quality square might be the answer. You can find the style box for all bond funds on their Morningstar Fund Reports.

Next: Our Bond-Fund Buying Advice >>

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