The bond fund is a unique type of investment that is offered by many different mutual fund companies. The bond fund provides an alternative to those that wish to avoid the stock market. Here are the basics of the bond fund and how they work.

The Bond Fund

A bond fund is a mutual fund that invests solely in bonds as the underlying investment. A bond fund will collect investments from individual investors and pool the money together. They will then use this money in order to purchase many different bonds. Some bond funds will choose to focus only on corporate bonds, while others will stick with government bonds.

How They Work

With a bond fund, a fund manager will be in charge of the investments of the group. The fund manager will research many different types of bonds and then purchase a certain number of them. When this happens, the mutual fund is essentially lending money to the entities from which they are buying the bonds. The corporations or governments will then make regular interest payments to the mutual fund. Mutual funds will then collect all of the thousands of interest payments that they receive on a monthly basis. At that point, they will divide the monthly payments up equally among all of the shareholders.

Regular Income

This type of mutual fund is great for those who wish to create a regular source of income for themselves. For those who are retired or near retirement age, this is a very popular investment. You can conserve your capital as well as bring in a monthly paycheck for yourself. You will also not be subject to the normal risks of investing in the stock market through a mutual fund.

Types of Bond Funds

Although all bond funds will invest in bonds, there are many different types of bond funds for you to choose from. For example, you can choose a municipal bond fund that invests only in municipal bonds. With this type of investment, the mutual fund will lend money to municipalities such as schools, local governments and airports. This type of investment is often preferred because the interest that you receive is not taxable.

Other bond funds will invest solely in United States Treasury securities such as T-bills. This type of bond fund is considered to be very low risk and will have a fixed rate of return.

Other bond funds will focus on corporate bonds. Corporate bonds are rated on the credit score of the parent company. Some bond funds will invest in "investment grade" bonds, which are considered safer, while others invest in "junk bonds," which are riskier. If a bond fund invests in junk bonds, they will potentially be able to bring in greater returns for the investors.

Performance

With bond funds, the potential for return is limited compared to funds that are comprised of stocks. However, you can still bring in some nice returns with these funds. Some of the best bond funds bring in annual returns of 8 to 10 percent. Many bond funds will bring you in a return of 4 to 5 percent as well.

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