A bond fund is an investment fund that acquires various types of debt as its primary form of investment. Examples of the securities that a bond fund may acquire are:
- Convertible bonds
- Corporate bonds
- Government bonds
- Mortgage-backed securities
- Municipal bonds
A bond fund may attempt to mimic the performance of the overall market by investing in a broad portfolio of debt securities. Or, the fund manager could attempt to beat the market's rate of return by investing in a much narrower corner of the market. A bond fund has the advantage of being diversified and allowing for the purchase or sale of fund shares every day (making it a highly liquid investment). A fund usually pays out income to investors each month, though the amount will vary depending on the nature of the underlying securities.
Given of the focus of this type of fund, gains and losses are highly subject to changes in the market interest rate, as well as the credit quality of the issuer. Thus, as the market interest rate increases, bond prices decline. As the credit quality of an issuer declines, so too does the price of its securities.