Investors in bonds and bond funds have recently enjoyed one of the most prolific bull markets in memory. As the US economy ground to a halt, bond issuers and investors stepped in at a record pace and were handsomely rewarded by the US Federal Reserve.

From December of 2000 to June of 2003 the US Federal Reserve cut interest rates an unprecedented 13 times from 6.5 percent to the current level of one percent.

One of the largest measures of the market, the Citigroup BIG (Broad Investment Grade) Bond Index, appreciated at more than 24 percent over this period. The simple explanation for the high returns is that the bond prices rose as interest rates declined.

During the same time money market funds have seen yields drop to all time low levels. That's about to change. Last week, Federal Reserve Bank of Atlanta president Jack Guynn all but confirmed that the Federal Reserve would raise the target rate later this month.

He also warned that the pace of future rate increases may be quicker than he and his colleagues had recently envisioned.

He said US inflation could rise more quickly than forecast, and if that happened the Fed would have to raise interest rates faster and farther than currently thought. This week's inflation data, although mixed, boosted this argument.

As the bond market goes through this transitional period, it is important to understand the risks associated with duration and what options you have as an investor. The bond market can still offer positive returns to those who stay on top of their accounts.

The obvious winners in this environment will be risk-averse investors whose returns in money market funds and certificates of deposit that have dwindled in recent years. Other short duration products will also do well in the coming months.

On the flip side, investors in bonds and bond funds with longer durations will suffer. The Citigroup Big Bond Index mentioned above has already begun to show the pain that accompanies higher interest rates.

The index is down more than 3.2 percent over the past three months. According to Morningstar, the average long-term government bond fund (AAA rated) is down almost seven percent over this time.

Even short-term bond funds have suffered with the average fund being down 1.65 percent over this time.

At more than $14 trillion in size, the US bond market is the largest securities market in the world. Yet to the average person the market is confusing and inaccessible. It can also be very expensive.

When it comes to bonds, unless you can buy a minimum of $50,000 or $100,000, you're going to suffer with a bond broker when it comes to commission. Most brokers build the commission into the price you're paying or charge fees on top of the purchase price.

To remedy this situation, invest in bond mutual funds that follow the mandate you are seeking. When these mutual funds buy bonds, they are buying blocks in millions of dollars and the investor gets the advantage of that pricing when you buy the fund.

When selecting a mutual fund, sites such as Morningstar.com (USA) and Micropal.com (UK and Offshore) track most funds. They can be a valuable resource when gathering information.

More importantly, assessing your risk level before you buy will help you chose a fund that is right for you.

For more information on Bond Mutual Funds, call your investment professional or LOM Asset Management at 295-6999.

Jon Heckscher is a Portfolio Manager for LOM Asset Management Limited, the investment subsidiary of LOM (Holdings) Limited.