Bond funds are a type of mutual fund that invests exclusively in bonds. Many times, bond funds are specialized by the type of bond they purchase, such as government, municipal, or corporate. Basically, if you invest in a bond fund, you are loaning money in order to receive regular interest payments until the borrower has repaid the balance of the loan (or you've sold your shares).
There are bond mutual funds for every risk-taker. If you want safe investments, consider government bond funds. Instead, if you are willing to gamble on high-risk investments, try high yield bond funds, also known as junk bond funds. If keeping your tax bill down is your primary goal, then municipal bond funds may be your best fit.
Types of bond mutual funds
Bond funds tend to be grouped according to the kinds of bonds in the fund. You can buy a fund that invests in:
Corporate bonds: a corporation is the borrower
Government bonds: the national government or its agency is the borrower
Municipal bonds: a state or local government or its agency is the borrower
Bond funds are also classified by maturity, or the date the borrower (whether it be the bank, the government, a corporation or an individual) must pay back the money borrowed. Using this division, bond mutual funds can be called short-term bonds, intermediate-term bonds, or long-term bonds.
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