Basics of Bond Funds

Bond mutual funds are such funds which specialize in investing in bonds and other debt securities. These are conservative investments looking to check the invested amount while paying out a regular income, which may be lower than that accruing to investors than that on equity funds. But they take lower degree of risk in search of some returns, which may also be lower than those generated out of equity markets. However, the degree of risk taken associated with investing bond mutual funds, often compared to benchmark, is much lower than that associated with holding an equity, or equity fund in the portfolio. The investors receive monthly or quarterly dividends from the fund that include interest payments on the fund's owned securities plus a small capital appreciation in the prices of the portfolio's bonds. Like other mutual funds, bond funds also have a net asset value (NAV), received by investors when they buy or sell units in such a bond fund.

Conservative investors averse to risk taking choose to buy bond funds for two reasons: income and diversification. For one, they pay higher dividends than money market and savings accounts, and the other they usually pay out dividends more frequently than individual bonds. Bond funds are also considered to be "low risk" investments that can provide stability to a portfolio. However, Bond funds are not risk-free investments -- they are still subject to the same credit and interest rate risks as regular bonds. But since the fund's investments are spread out among many bonds, the overall risk is usually lower. Like some types of bonds, certain bond funds may be exempt from federal and/or state taxes. These include the municipal bonds floated for some purpose.