What are bond funds?

A bond fund is a means of collectively investing in bonds and other types of debt products. Bond funds can include or be focused on government bonds, corporate bonds, convertible bonds or any other mortgage-backed security. Unlike other investment opportunities like money market accounts and Certificate of Deposits (CDs), bond funds typically pay out more often, as they gain value from both the underlying securities involved as well as capital appreciation. In what follows, you’ll find out more about the types of bond funds and the overall pros and cons of such funds.

There are four broad types of bond funds.

1. Government bond funds are made up of treasury securities, which are extremely safe due to their backing by the government; however, this security makes them very low yield.
2. Mortgage bond funds are backed by government mortgage companies line Ginnie Mae, Freddie Mac and Fannie Mae, and pay higher rates than Government Bond Funds.
3. Corporate bond funds come from corporations, and are much riskier than the previous two types, as they rely on private companies to pay back their loans.
4. Municipal bond funds are issued by state governments, and often come with the added benefit of being tax free.

Unlike individual bonds, bond funds have the advantage of being closely managed by experts, general diversification and automatic reinvestment of gains. What’s more, they’re also more liquid than other bonds, as they can be sold prior to maturity. Compared to individual bonds, bond funds have the downside of lacking a 100% guarantee that the face value will be returned, as they fluctuate in price based on the market.