Definition
The term bond fund refers to a portfolio of debt instruments as well as other types of indentures. Bond funds will hold debt instruments of different maturities, thereby providing investors with a steady source of income over time.
Explanation
Bond funds offer individuals the ability to buy a diverse set of debt instruments, which helps to insulate the investor from interest rate fluctuations, in addition to providing a reliable source of income. As is the case with stocks, bonds vary in quality. Funds holding non-investment quality debt, such as junk bonds, will offer higher rates of return. However, the risk of default will be higher too.
The debt instruments in a bond fund are typically structured to vary in maturity. As bonds mature, the fund's management team will purchase new securities. There are a large number of specialty bond funds, including those that hold corporate, high-yield (junk bonds), government, global, international, inflation-protected, municipal, and mortgage-backed securities.
While bond funds can help insulate investors from interest rate risk, these investments cannot protect individuals from loss of principal. As interest rates decrease, the value of the bonds in a portfolio will increase, thereby providing the investor with capital appreciation. As interest rates increase, the value of the bonds in the portfolio will decrease, thereby exposing the investor to a capital loss.
Generally, bond funds are considered fairly conservative investments. Individuals choosing to hold bond funds will oftentimes have relatively low risk tolerance scores.
Related Terms
- The term target date fund refers to a portfolio that changes the allocation of assets to a more conservative proportion over time. Target date funds are a subset of asset allocation funds, offering individuals a variety of timelines over which the portfolio rebalances.
Moneyzine EditorNovember 6th, 2024 
The term adjustable rate preferred stock refers to a security that varies the level of dividends paid with a benchmark. The rate of dividends paid typically resets on a quarterly basis, and the most common benchmark is the Treasury bill.Moneyzine EditorNovember 6th, 2024- The term real estate fund refers to an investment strategy that focuses on securities issued by real estate companies. The objective of real estate funds is to allow investors to participate in the market without directly purchasing properties.Moneyzine EditorNovember 6th, 2024
