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Bond fund

A bond fund is a mutual fund that is invests in bonds.

Expanded Definition

A bond fund is considered a fixed income. Most bond funds pay interest monthly, and rates tend to be steady, but the interest paid does change gradually along with changes in the investment portfolio. The yield that bond funds pay tends to track market rates, but the NAV varies rather than the interest paid per share.

The NAV of a bond fund changes with the market value of its portfolio. Most funds recalculate the NAV at the close of every business day, and that NAV then becomes the trading price for all pending buy and sell orders. Newspapers and other information agencies receive that number as being the price of the fund's shares until the close of the next business day.

Bond funds come in a variety of styles, including tax-free, municipal, long, short, corporate, high-yield, closed-end, and government (including Treasuries and Government National Mortgage Association bonds). Some bond funds are leveraged.

Investors choose bond funds for their professional management and diversification. Most investors considering bond funds should seek out investment-grade bond funds as their core investment and should consider the average maturity of each fund.

As with bonds, the yield and NAV of a bond fund changes with interest rates. A short-bond fund tends to be less volatile and generally carries a lower risk. Funds with a longer average maturity pay higher interest, but their NAV will vary more with interest rates and related news.

Individual investors who own bonds directly have the ability to hold their bonds to maturity and collect their face value. Bond fund owners do not have that option. But one usually needs to invest $25,000 or more in a bond portfolio, so small investors are generally better served by buying bond funds rather than individual bonds.

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