Bond Funds and Income Funds: A Simple Introduction

 Bond Funds and Income Funds: A Simple Introduction

What is a bond fund?

When we talk about bond funds, we mean investment funds that invest primarily in debt-based investments (such as bonds of governments and private companies). These funds are usually in the form of mutual funds, ETFs or unit investment trusts.

Bond funds can invest in different types of bonds:

Government bonds

Municipal bonds (issued by state and local governments)

Corporate bonds

Mortgage-backed securities

Zero-coupon bonds

Each bond has its own specific objective and risk, so it is important to choose a fund carefully.

Can you lose money in a bond fund?

Yes, you can. Some people believe that bond funds are always safe, but this is not entirely true. There can be many types of risks in these:

1. Credit Risk

If the institution that has issued the bond fails to repay its debt on time, then there may be a loss.

2. Interest rate risk

Changes in interest rates in the market also cause the price of bonds to rise and fall. When the interest rate rises, the price of the bond falls.

3. Prepayment Risk

Sometimes companies repay the bond before the scheduled time. This does not give the fund a chance to invest again at the same return.

Do municipal bonds get tax exemption?

Some bond funds invest in municipal bonds, the interest from which is usually exempt from federal tax. If you are a resident of the same state where the bond is issued, then you may also get exemption in state tax. But this does not apply to every bond, so read the fund documents.

What are ultra-short bond funds?

These funds invest in bonds that have a very short duration — typically a few months to a year or two. Their aim is to provide stable returns in a short period of time.

Though the risk is slightly higher than money market funds or bank FDs, they are still good for those who do not want to take too much risk.

Conclusion

You can expect regular income from bond funds and income funds, especially if you want to stay away from the volatility of the stock market. But it is important that you get complete information about the fund, understand the risks and invest according to your needs.