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A bond fund, sometimes known as a debt fund, is a type of pooled investment vehicle that primarily invests in bonds (government, municipal, corporate, convertible), as well as other debt securities including mortgage-backed securities (MBS). A bond fund’s main objective is frequently to produce monthly income for its clients.

The majority of investors have access to both bond mutual funds and bond exchange traded funds (ETFs).

A fixed-income securities portfolio is where a bond fund primarily invests.

Bond funds offer investors immediate diversification for a small required minimum investment.

A long-term bond has a higher interest rate risk than a short-term bond because of the inverse relationship between interest rates and bond prices.

A mutual fund that only invests in bonds is known as a bond fund. For many investors, investing in bonds through a bond fund is more cost-effective than purchasing individual bonds. Bond funds, unlike individual bonds, do not have a maturity date for the repayment of principal, hence the principal invested may change occasionally.

Additionally, the interest received by the underlying bond instruments held in the mutual fund is shared indirectly by investors. The allocation of interest income will change each month because interest payments are issued on a monthly basis and take into account the composition of all the different bonds in the fund.

The majority of bond funds are made up of a specific kind of bond, like corporate or government bonds, and are further classified by how long they will take to mature—short-, intermediate-, or long-term.

Only the safest bonds, including those issued by the government, are included in some bond funds. Investors should be aware that U.S. government bonds are not rated and are thought to have the greatest credit grade.

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