Fixed-income securities such as bonds are the natural choice of investors for whom a regular income stream takes precedence over capital appreciation. However, the cost of creating a portfolio of bonds from various categories may become prohibitive. This is why many investors opt for mutual funds as a convenient and affordable method of investing in bonds. Diversified bond funds further reduce the risk associated with such instruments by holding securities across sectors. Thus, any negative fluctuation in a sector only has a partial effect on the fund’s fortunes.

Below we will share with you 5 top rated diversified bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all diversified bond funds, then click here.

Putnam Diversified Income A ( PDINX - MF report ) seeks current income and preservation of capital. The fund invests 15% to 65% of its assets in government securities and domestic and foreign corporate bonds. The fund primarily purchases corporate bonds which are rated investment grade. The diversified bond mutual fund returned 15.16% in the last one year period.

The diversified bond mutual fund has a minimum initial investment of $500 and an expense ratio of 1.01% compared to a category average of 1.13%.

Columbia Strategic Income A ( COSIX - MF report ) invests in three categories of debt securities. These include, U.S. government bonds and assets backed securities; foreign securities, including those issued from emerging markets and corporate debt rated below investment grade or unrated securities of similar quality. The diversified bond mutual fund has a three year annualized return of 7.25%.

Laura Ostrander is the fund manager and has managed this diversified bond mutual fund since 2000.

Baird Core Plus Bond ( BCOSX - MF report ) seeks an annual rate of total return which is higher than that of the Barclays Capital U.S. Universal Bond Index. The fund invests heavily in domestic securities issued by the government or corporate entities. The diversified bond mutual fund returned 11.67% over the last one year period.

As of September 2010, this diversified bond mutual fund held 392 issues, with 3.54% of its total assets invested in United States Treasury Bonds 6.25%.

Virtus Multi-Sector Fixed-Income A ( NAMFX - MF report ) utilizes at least 80% its assets to purchase a wide range of fixed income securities. It purchases U.S. government securities, investment-grade as well as high yield domestic debt securities. The diversified bond mutual fund has a five year annualized return of 7.08%.

The diversified bond mutual fund has a minimum initial investment of $500 and an expense ratio of 1.16% compared to a category average of 1.13%.

Oppenheimer Global Strategic Income A (OPSIX) seeks a high level of current income. It invests the majority of its assets in securities issued by the US government and high yield domestic and foreign securities. The diversified bond mutual fund has a ten year annualized return of 7.25%.

Arthur K. Steinmetz is the fund manager and has managed this diversified bond mutual fund since 1989.

To view the Zacks Rank and past performance of all diversified bond mutual funds, then click here.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at http://www.zacks.com/funds.