Bond Fund Basics

• A bond fund invests money in various bond issues. Bond funds have different goals, from preserving capital to producing income, with most bond funds seeking to provide a mixture of both. Bond funds that seek to produce high income are the most risky, often investing in "junk bonds" that pay the highest interest rate. Bond funds charge fees for the administration of the fund. Various financial media sources report the value of bond funds, allowing investors to stay updated on a fund's performance.
  
  

Professional Management

• One advantage to investing in a bond fund is the professional management of the fund. Given the sheer number of bonds available on the market, it is difficult for the average investor to choose which bonds to buy, which to hold and when to sell. By using a bond fund, a professional manager or team of managers makes these decisions. These professional managers typically have advanced financial degrees and many years of experience in buying and selling bonds. Investors can look at the historic return of the bond fund to see the returns that the management has produced in the past.
  
  

Liquidity

• Investors in a bond fund can quickly sell the investment and convert it into cash. With many investments, investors must wait a specific period of time or pay a penalty to withdraw funds from an investment. Bond funds do not have this restriction. Holders of individual bonds can also sell the bond at any time to another investor. However, while some bonds may sell quickly, it may take some time to find a buyer, depending on the type of bond.
  
  

Income

• One feature of bond funds that most investments do not offer is income. With a bond fund, the investors may receive periodic payments from the fund, with some funds offering monthly payments. Holders of individual bonds will also receive payments, but typically individual bonds only issue payments twice a year. Investors in a bond fund may also elect to reinvest the monthly payment back into the bond fund. Investors may choose bond funds that create monthly payments that are not subject to federal income taxes. Some bond funds are also not subject to state income taxes.