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What is a Bond Fund?

Article Details
  • Originally Written By: Ally E. Peltier
  • Revised By: Bott
  • Edited By: Lucy Oppenheimer
  • Last Modified Date: 24 October 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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A bond fund is a mutual fund made up of monies invested in an assortment of bonds or other debt securities. Bonds are interest-paying documents or certificates that identifies a debt to a public or private corporation. When an investor purchases a bond, he is loaning money to the bond's issuer, usually a company, for a specified length of time. The issuer uses the loaned money to run it's day-to-day operations, and the due date for payback of the initial loan amount is the bond's "maturity date."

Benefits

A bond fund is a great way to invest in a wide variety of companies — as with all investing, diversification is generally key to reduced risk and greater returns. Some bonds, and their funds, have special tax advantages or are tax-exempt, such as Municipal Bond Funds. A bond fund can also be a source of income as they pay out interest on each fund, usually monthly, until the fund matures, which can be a great source of income for investors nearing or in retirement.

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How to Purchase Bond Funds

While individuals can purchase bonds on their own through various companies online, a bond fund is usually managed by professionals skilled in balancing an investment selection that will provide the greatest stable return against the fluctuations of the market. Investment advisors work for several large and small investment companies and often offer the simplest route to buying bonds. There are also many services available on the Internet to help research the multitude of available bond funds and their past performance, and an investment advisor should be able to answer questions and purchase the bond for an investor.

When purchasing shares of a bond fund, there is no guaranteed return of the principal like there is with individual bonds that are held to maturity. Each bond in the fund will have its own maturity date, of course, but the bond fund as a whole usually does not. As a result, it is best to pay attention to the investment in a bond fund in order to determine the best time to sell shares. It is also possible to choose a bond fund that is designed with specific investment horizons in mind, such as short-term bond funds that include holdings maturing in as little as two years.

Treasury and Corporate Bonds

Many companies and public organizations use bonds, from municipalities to large corporations to governments. For example, when purchasing a US Treasury bond, a buyer is essentially lending money to the US government for the use of operating costs or to pay off debt. This type of bond is fairly safe, but it has a relatively low interest rate. It is also possible to purchase corporate bonds, through which money is lent to a corporation. Generally, there is potential to earn more of a return on these, but there is also a greater risk in that the company may lose money on its ventures, causing it to default on its loans.

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