Under conventional asset allocation theories, bonds are an integral factor in portfolio creation and diversification. Debt securities issued by government entities and corporations offer an opportunity to generate income through steady interest payments along with modest capital appreciation in some instances, while safeguarding investors from the volatility and risk exposure inherent to broad equities markets. Bond holdings provide a sense of security for investors, as these investments have a negative correlation to the stock market. When equity investments decline, bond investments are typically on the rise.

Although bonds are considered less-risky investments than their equity counterparts, investors should be aware of their potential for loss. Interest rate risk, credit risk and a degree of market risk exist with bond investments, all of which are tied to the type of bond held and how long the bond has until it reaches maturity. Corporate bonds typically bear more risk than government issues, and lengthy maturity dates increase the exposure of interest rate risk tied to the investment. While interest rate risk is a pressing topic in today's low-interest-rate market, investors with a long-time horizon can utilize long-term bond holdings to hedge against the volatility of equity positions within a portfolio. Additionally, investors can spread out bond risk factors by selecting top-rated bond mutual funds that consist of a diversified portfolio of debt securities. The best long-term bond mutual funds for 2016 are listed below.

PIMCO Long-Term Credit Fund

Established in 2009, the PIMCO Long-Term Credit Fund has generated a five-year annualized return of 7.4%. The fund's managers seek to provide investors with a total return that exceeds the assigned benchmark consisting of fixed-income securities. Of the fund's $3.3 billion assets, a minimum of 80% is invested in a diversified portfolio of bonds with varied maturities. The majority of fund assets are invested in investment-grade debt obligations, but fund managers have the flexibility to invest up to 20% of total assets in junk-bond holdings. The average maturity date of bonds held within the mutual fund is 23.74 years, with an average duration of 11.5 years.

Top holdings within the PIMCO Long-Term Credit Fund focus on the United States, with 24.12% of the portfolio made up of government debt securities. The fund also holds 20.96% of total assets in corporate bonds, 2.16% of assets in securitized debt instruments and 2.52% in municipal issues. The fund has an expense ratio of 0.65%, which is slightly higher than the category average for comparable funds. Investors are not charged a sales load at time of purchase or redemption, but a $1,000 minimum initial investment is required.

Vanguard Long-Term Bond Fund

The Vanguard Long-term Bond Fund was started in 1994 and has generated a 10-year annualized return of 6.60% since that time. The fund's managers seek to track the performance of a market-weighted index focused on a long-term, dollar-weighted average maturity of fixed-income securities. The fund's $8.95 billion assets are invested in similar holdings found in the Barclays U.S. Long Government/Credit Float Adjusted Index, which includes all medium and large issues of U.S. government, investment-grade corporate and investment-grade international dollar-denominated bonds with maturities equal to or more than 10 years. The average maturity date of the fund's holdings is 24.1 years, and the average duration of bonds within the mutual fund is 14.77 years.

The Vanguard Long-term Bond Fund diversifies bond holdings in terms of type of debt and debt rating. As of November 2015, the mutual fund invests 48.92% of its total assets in government bonds and 45.77% in corporate issues. Bonds with a AAA rating make up 40.69% of the portfolio, followed by BBB-rated bonds at 29.38%, A-rated bonds at 22.8% and AA-rated bonds at 7.13%. The fund has an expense ratio of 0.2%, making it one of the most inexpensive long-term bond funds available. Investors are not charged a sales load for purchase or redemption of shares, but a $3,000 minimum investment is required.

Nuveen U.S. Infrastructure Bond Fund

The Nuveen U.S. Infrastructure Bond Fund is a newer offering in the long-term bond fund market, with an inception date of May 2014. Since its creation, the fund has generated a one-year return of 0.90%. The fund's managers seek to provide current income and limited risk to capital by investing a minimum of 80% of fund assets in infrastructure-related debt securities issued by U.S. entities. Of the fund's $8.23 million assets, managers have the flexibility to invest up to 20% in debt obligations of non-U.S. issuers located in emerging markets. Additionally, the mutual fund may invest up to 40% of assets in securities with a rating of below investment grade. The average maturity of bonds held within the fund is 18.24 years, and the average duration is 9.87 years.

The Nuveen U.S. Infrastructure Bond Fund diversifies its bond holdings among various types, including government bonds that make up 10.98% of the portfolio, corporate bonds that make up 35.54% of the portfolio and municipal bonds that make up 51.6% of the portfolio. The majority of the bond investments are AA-rated bonds, comprising 40.1% of total assets, followed by A-rated bonds at 19.94%, BBB-rated bonds at 14.2% and B-rated bonds at 12.66%. The mutual fund has an expense ratio of 0.95%, which is higher than the category average, and investors are assessed an upfront sales load of 4.25%. A $3,000 minimum investment is required for non-qualified accounts.

Virtus Disciplined Select Bond Fund

The Virtus Disciplined Select Bond Fund was established in 2012, and since that time it has generated an annualized one-year return of -2.2%. The fund's managers seek to provide investors with high total return from current income and a secondary investment objective of capital appreciation. Maximization of bond holdings within the fund takes place by allocating the fund's $1.47 million assets among six subsectors within the Treasury, Treasury inflation protection securities (TIPS) and corporate bond markets. The fund's managers implement a quantitative model to diversify holdings, which estimates performance trends over the long term. The average maturity for fund holdings is not available, but the average duration is 7.34 years.

As of November 2015, the Virtus Disciplined Select Bond Fund's holdings consist of 14.12% government bonds and 76.92% corporate issues. The majority of the fund's assets are held with issuers in the United States, although 3.5% are located in the United Kingdom, 2.22% in Canada and 2.05% in the Netherlands. Bonds with an A rating make up 27.75% of the portfolio, followed closely by BBB-rated bonds at 24.53%, AAA-rated bonds at 20.36% and BB-rated bonds at 10.61%. The fund has an expense ratio of 1.4%, which is relatively high compared to similar mutual funds. Investors are assessed a sales load of 3.75% when they purchase shares, and a minimum initial investment of $2,500 is required.

GuideStone Funds Extended-Duration Bond Fund

The GuideStone Funds Extended-Duration Bond Fund was launched in 2001, and since that time it has generated a 10-year annualized return of 7.3%. The fund's managers seek maximum total return with capital preservation as the immediate focus. A minimum of the fund's $268.52 million assets are invested in fixed-income securities of issuers located within the United States. Managers have flexibility to invest up to 30% of fund assets in debt obligations denominated in non-U.S. dollar securities as well. The average maturity of bond holdings within the fund is 26.1 years, and the average duration is 13.3 years.

The GuideStone Funds Extended-Duration Bond Fund diversifies holdings across various issuers, including government bonds (which make up 28.18% of the portfolio) and corporate bonds (which make up 66.17% of the portfolio). As of November 2015, 80% of the fund consists of U.S. debt securities, 4.29% consists of Canada issues, 4.21% consists of U.K. issues and 3.1% consists of Australia bonds. Holdings are diversified among ratings as well, including 29.7% in A-rated bonds, 29% in BBB-rated bonds and 26.8% in AAA-rated bonds. The mutual fund has an expense ratio of 0.75%, and no sales loads are imposed at the time of purchase or redemption. Investors are required to provide an initial investment of $1,000.

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