For most individual investors, bond mutual funds are the easiest way to invest in fixed income securities.

Bonds and bond funds are an important part of a balanced investment portfolio. For most investors, the cost of building a diversified bond portfolio is prohibitive. Bond mutual funds are cheaper and more efficient.

In general, stocks and stock mutual funds provide higher returns than bond funds over the long term—but that higher return comes with higher risk. Bond funds tend to be less volatile than stock funds, and they can also provide you with a source of steady income.

Within the world of bond funds, there are also different levels of risk and return. Just as you’d want your first stock mutual fund to own a broad, diversified group of stocks, it’s a good idea for your first bond fund to own a mix of government and corporate bonds, which have different levels of risk, perform differently in different environments, and offer different levels of yield. Of course, that still leaves you with a lot of funds from which to choose. Some of the factors you’ll want to consider in choosing a bond fund are the same things you’d look at when choosing a stock fund. You can sift through funds here .

Here are some specific factors to consider when choosing a bond fund:

Start with expenses. Expenses make a big difference to any investor, but they’re particularly important when you’re evaluating bond funds. Bond funds tend to have lower potential returns than stock funds—which means the same dollar in expenses represents a bigger chunk of your potential return. Look for a fund with average or below-average expenses. The average expense ratio for an intermediate-term U.S. bond fund is 0.88%, according to Morningstar.

• The lower the risk, the more expenses matter. Riskier bond funds have higher potential returns, but not necessarily higher expenses. Fund expenses are related to costs, not returns.
• The lower interest rates are, the more expenses matter. Low interest rates mean your fund’s income stream will be lower— which also magnifies the impact of that expense ratio.

Understand a fund’s credit risk. A bond is a loan; credit risk is the chance that the institution you’re lending to won’t pay it back. A U.S. Treasury bond is considered very low-risk, while corporate bonds are riskier. A-rated bonds are the safest, while anything below BBB is not considered an investment grade bond. Check the fund company’s website, or the fund portfolio pages at SmartMoney.com to see both the fund’s average credit quality and the actual mix of bonds behind that average.

• Default isn’t the only risk. Default—when an institution fails to make an interest payment or pay back its debt in full—is the worst-case scenario, but low-quality, high-risk bonds can also see their prices drop in a recession or a time when investors are particularly nervous. Check your fund’s portfolio page at SmartMoney.com and to see what percent of the fund’s portfolio is in lower-rated bonds.
• You don’t have to avoid higher-risk funds. You just want to make sure you understand what kind of bonds the fund holds. In fact, riskier bonds won’t be as sensitive to changing Treasury bond interest rates, so they may boost a fund’s performance in some scenarios.

Understand interest rate risk. Interest rate risk is the risk that that rates will be higher (or lower) in the future than they were when you bought a bond. Imagine if you buy a bond today that pays a rate of 3%, and then tomorrow interest rates rise and a similar bond is paying 5%. The price other investors are willing to pay for your bond will fall because it’s now possible to buy bonds that pay more interest.

• Check the average duration of the bonds a fund holds. For a bond fund, the average duration of the bonds a fund holds will determine how sensitive its portfolio is to interest-rate risk. Longer-term bonds will suffer more if interest rates rise. Find your fund at SmartMoney.com and click on the Portfolio tab to see what percentage of a fund’s portfolio is in bonds of different maturities, and compare to the average fund in that category.
• Interest rate risk can be greater when rates are low. Bond prices fall when interest rates rise — so the lower interest rates are, the more interest rate risk you’re taking on if rates move up significantly. When investment professionals talk about the 30-year bull market for bonds in the U.S. they’re talking about the long period when interest rates were generally falling, making bond prices rise. A fund that has more longer-dated bonds will suffer more when rates rise. A fund company’s website should also provide some commentary from management about any steps they’re taking to reduce this risk. You can also read more here .
• Get a sense of how the fund performs in a crisis. Most investors want their bond holdings to be pretty stable, expecting their stock portfolio to make them more money, and their bond portfolio to earn some steady income and avoid big losses. Because you’re looking for stability, it makes sense to look at a couple of short time periods, whereas with a stock fund you’d probably focus more on overall long-term performance. Take a look at the fund’s performance during the financial crisis in 2008, when a lot of higher-credit risk funds took big hits. Then look at the period between November 2010 and January 2011, when Treasury yields spiked, to get a feel for how the fund has handled interest rate risk.

What not to do when choosing a bond fund.

• Don’t just go for the highest yield. Generally speaking, higher yield means higher risk. Again, you don’t necessarily have to avoid higher-risk funds—but you should understand what you’re buying.
• Don’t buy the same fund twice. If you own a diversified bond fund, there’s a chance that you’re already holding specific sectors like emerging market bonds—so buying an emerging-market bond fund could leave you overexposed to that sector. Know what kinds of bonds your funds own. Find your fund at SmartMoney.com and check the fund’s Portfolio to see a sector breakdown of the fund’s holdings, showing what percentage of the portfolio is in Treasuries, municipal bonds, and so on, compared to the category average.

For more to read. Morningstar’s Investing Classroom has some great introductory material on bonds and bond funds. So does the American Association of Individual Investors. Fund companies’ websites should also explain the types of bonds a fund owns. This article explains in more detail how to test your portfolio’s interest rate sensitivity.