what is a bond fund 
a bond fund is a mutual fund or an exchange traded fund etf that buys and sells debt instruments like government and corporate bonds the primary goal of a bond fund is to generate monthly income for investors for an investor a bond fund is an alternative to buying individual bonds the investor in a bond fund is buying shares in a fund that buys and sells many bonds typically a bond fund manager buys and sells according to market conditions and rarely holds bonds until maturity understanding bond fundsfor many investors a bond fund is a more efficient way of investing than buying individual bond securities unlike individual bond securities bond funds do not have a maturity date for the repayment of principal so the principal amount invested may fluctuate from time to time investors in bond funds receive monthly payments that reflect the mix of all the bonds in the fund which means that the interest income payment will vary monthly bonds are rated according to the degree of risk that their issuers will default on their debts an aaa or aa bond is issued by a company or government that is highly unlikely to default an f bond is on the edge types of bond fundsmost bond funds are comprised of a certain type of bond such as corporate or government bonds they also focus on a time to maturity such as short term intermediate term and long term 1investors can choose bond funds that buy only the highest quality and safest bonds such as u s government bonds or the bonds of blue chip companies high quality bonds pay lower interest than riskier bonds investors should note that u s government bonds are considered to be of the highest credit quality 2 bond funds that specialize in u s treasury securities including treasury inflation protected securities tips are the safest but offer the lowest potential return 3other funds invest in only riskier bonds high yield or junk bonds bond funds that invest in riskier bonds offer higher returns along with a higher risk of default by the bond issuer there are also bond funds that have a mix of the different types of bonds to create multi asset class options the types of bond funds available include us government bond funds municipal bond funds corporate bond funds mortgage backed securities mbs funds high yield bond funds emerging market bond funds and global bond funds mutual funds have been investing in bonds for many years some of the oldest balanced funds which include allocations to both stock and bonds date back to the late 1920s bond fund benefitsbond funds are an attractive option compared to buying individual bonds they provide greater portfolio diversification than an individual investor could manage independently by investing in a bond fund an investor need only pay the annual expense ratio that covers marketing administrative and professional management fees the alternative is to purchase multiple bonds separately and deal with the transaction costs associated with each since a fund usually invests in many bonds of varying maturities the impact of any single bond s performance is lessened another benefit of a bond mutual fund is that it provides access to professional portfolio managers who have the expertise to research and analyze the creditworthiness of bond issuers and market conditions before buying into or selling out of the fund for example a fund manager may replace bonds when the issuer s credit is downgraded or when the issuer calls or pays off the bond before its maturity date special considerationsbond funds can be sold at any time for their current market net asset value nav which may result in a capital gain or loss individual bonds can be harder to unload from a tax perspective some investors in higher tax brackets may find that they have a higher after tax yield from a tax free municipal bond fund investment rather than a taxable bond fund investment due to the inverse relationship between interest rates and bond prices a long term bond carries greater interest rate risk than a short term bond therefore the nav of bond funds with longer term maturities will be impacted greatly by changes in interest rates this in turn will affect how much interest income the fund can distribute to its participants monthly bond etfsbond etfs have been around for less time than bond mutual funds with ishares launching the first bond etf fund in 2002 4 most of these offerings seek to replicate various bond indices although a growing number of actively managed products are also available etfs often have lower fees than their mutual fund counterparts like stocks etfs trade throughout the day the prices for shares can fluctuate moment by moment and may vary quite a bit over the course of a day s trading 5bond etfs operate much like closed end funds in that they are purchased through a brokerage account rather than directly from a fund company 