How Do Bond Funds Work?
Mutual fund structure Bond funds are mutual funds that buy bonds and other debt instruments. There are two main types of mutual funds; open-end and closed-end. Most bond funds are open-end funds which are less volatile than closed-end funds. Each time an investor adds money to the fund new shares of the fund are issued, these funds are not traded between investors. Some bond funds are actively managed while others are index funds. Index funds buy a specific type of bonds, say all corporate bonds issued in the United States. Actively managed funds have a fund manager that uses investment expertise to pick specific bonds in the hopes of out performing bond indexes. Investors buy bond funds to achieve relatively stable earnings which average 6-8% over long holding periods. To achieve these returns bond funds purchase bonds and use the coupon and maturity payments to return gains to the funds investors. Types of Bond Funds There are four main types of bond funds: international, core, short
