Investing Assets & Markets Bonds What Are Intermediate-Term Bond Funds? By Melissa Phipps Melissa Phipps Twitter Melissa Phipps is a retirement planning and investing expert who has covered those topics for more than 20 years as a writer, editor, and author. Her writing has appeared in Worth, Financial Planning, Financial Advisor, The American Lawyer, Institutional Investor, and many other publications. learn about our editorial policies Updated on March 9, 2022 Reviewed by Thomas J. Brock Reviewed by Thomas J. Brock Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities. learn about our financial review board Fact checked by Emily Ernsberger In This Article View All In This Article Definition of Intermediate-Term Bond Funds How Intermediate-Term Bond Funds Work Pros and Cons Photo: Tom Wener / Getty Images Definition An intermediate-term fund is a bond mutual fund that invests in a basket of intermediate-term bonds, which are typically those that mature between five and 10 years. Key Takeaways Intermediate-term bond funds invest in bonds that mature between five and ten years.Investing in intermediate-term bond funds offer instant diversification.Past performance doesn't indicate potential future gains because interest rates generally dictate returns. Definition and Examples of Intermediate-Term Bond Funds Intermediate-term bond funds invest in bonds that offer investors a five- to ten-year turnaround. Mutual funds pool money from many investors and invest it with a specific goal or investment type in mind. They tend to be easier to buy than individual bonds because the fund managers do the research for you. The minimum amount needed to invest is also usually lower. With a bond fund, you diversify your holdings, and you may be invested in a lot of different types of bonds—government, corporate investment-grade, corporate high-yield, municipals, for example—which minimizes the risk of default wiping out all of your assets. Intermediate-term bond funds are no different and will provide you with diversification within that bond fund class. Maintaining a diversified mix of investments from different asset classes is an important element of any investment plan. That is why it is important to monitor your total asset allocation mix across all investment asset classes. Investment decisions should always be made with consideration to your time horizon and risk tolerance. Note The Financial Industry Regulatory Authority (FINRA) offers a Fund Analyzer that offers information and analysis on more than 30,000 funds of different types. How Intermediate-Term Bond Funds Work Bonds have maturity dates—which is when the bond issuer pays back the principal or face value of the bond—that can range from less than one year to several decades. Breaking down this range into smaller time periods makes it easier for investors to determine how certain bonds align with their investment strategy and financial goals. Ranges are generally defined as: Short-term: Less than one year to five yearsIntermediate-term: Five to ten yearsLong-term: Ten years or longer Short-term bonds offer less interest rate risk than long-term bonds, but they're often thought of as an alternative to money market funds with their relatively low returns. When interest rates rise, the price of an existing bond goes down, because investors would get a higher return by buying a new bond that pays higher interest. Note General investment wisdom dictates that short-term bonds are best when rates are rising, and long-term bonds are best when rates are going down. When interest rates are uncertain, staying in the intermediate-term can be a happy medium. That's because you'd take on less interest rate risk than you would with a long-term bond while getting a slightly better return than you might from a short-term bond. Fees are one of the most critical factors when choosing a mutual fund. The average domestic bond fund has an expense ratio around 0.42%, but you may find a bond index fund that's even less costly. More importantly, look for a no-load fund. Loads are additional commissions or expenses that you may pay at the front-end when you first buy the bond, or on the back-end once you sell. Pros and Cons of Intermediate-Term Bond Funds Pros Less work for the investor Automatic diversification Cons Lower returns compared to stocks Inflation risk Pros Explained Less work for the investor: When investing in an intermediate-term bond fund, you eliminate a lot of the work that goes into researching individual companies, their financial health, and the value of the investment. When deciding to invest in a bond fund, the only research needed is information about the fund itself, not necessarily the fund's individual companies. Automatic diversification: Not only is diversification important in regards to investment type, but it's also important to have within asset classes. Investing in intermediate-term bond funds gives you instant diversification by spreading the investment over various company types and bond risks. Cons Explained Lower returns compared to stocks: While bonds are generally considered safer investments than stocks, they also offer much lower returns. If you're younger and want to focus on growing your portfolio instead of capital preservation, bonds may not offer high enough returns to satisfy you.Inflation risk: Inflation happens when the purchasing value of the dollar drops. With bonds offering low returns, there's a chance that the bond's interest rate doesn't keep up with the rate of inflation. If your bond offers 1%, but inflation rises by 2%, your purchasing power decreases. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Financial Industry Regulatory Authority. "Fund Analyzer Overview." Investment Company Institute. "Trends in the Expenses and Fees of Funds, 2020," Page 1.