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Will New Bond Fund Aficionados Stick Around?

Although bonds witnessed the most inflows of any asset class last year, investors must be wary of the possible risks on the horizon.

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Investors flooded bond funds with cash in 2009. For the year, U.S. open-end bond funds took in $357 billion, far more than any other asset class. For perspective, fixed-income funds took in more flows in 2009 than they saw over the previous five calendar years combined.

Several factors explain this stampede. Low yields in other income-producing investments, such as money market accounts and bank CDs, likely pushed some income-hungry investors into bond funds. There was probably a bit of performance-chasing going on, too. Bonds held up better than most other asset classes in 2008, and they also outperformed equities for the decade, as measured by the major market indexes.

Finally, and perhaps most importantly, after experiencing harrowing losses in 2008, many investors may have reassessed their capacity for risk and increased their portfolios' allocations to lower-volatility asset classes.

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Sonya Morris has a position in the following securities mentioned above: VBMFX. Find out about Morningstar’s editorial policies.