Significance

• If an investor were to purchase bonds on his own, he would most often have to invest in increments of $1,000. A bond mutual fund usually sells for much less per share, and they have the added benefit of diversification. Also, someone who depends on the interest of the bond mutual fund, it is often higher than could be received from a bank savings instrument.
  
  

Types

• There are basically three types of bond mutual funds. The most conservative of those invest only in bonds issued by the government. They are considered safe because they are backed by the government, itself. The second type invests in bonds issued by states and municipalities to build roads, schools and for other purposes. Then there are those funds whose assets are comprised only of bonds that have been issued by corporations. There are also mutual funds that invest in zero coupon bonds, in bonds issued by foreign governments. Finally, there are those that invest in corporate bonds that can be converted into stock.
  
  

Benefits

• Diversifying a portfolio is very important to most investors. If they were to purchase individual bonds, they would often not be able to accomplish this objective. A bond mutual fund will invest in many bonds on behalf of its shareholders, which allows each of them to spread the risk. Furthermore, there are bond mutual funds called multi-sector funds that invest in various types of bonds, such as corporate and municipal bonds, and those issued by both the United States and foreign governments. Those funds can meet the need of any portfolio where diversification is key.
  
  

Misconceptions

• Many people shy away from mutual funds that invest in corporate bonds because they feel they are too risky. While there are funds that reach for maximum income by investing on lower-rated issues, for the most part, there are mutual funds that only invest in bond that are "investment grade," those issued by the most stable companies in the world. Furthermore, many limit their holding to bonds that are backed by collateral.
  
  

Geography

• Years ago, investors knew little about the benefits of investing in bonds issued by foreign governments. For one, emerging governments can provide a superior return to investors who buy shares in mutual funds that only buy that type of investment. The Internet and the globalization of those governments now provide the necessary information to enable investors to make the right judgments.