Welcome to MutualFunds.com. Please help us personalize your experience.

Select the one that best describes you

Your personalized experience is almost ready.

Join other Individual Investors receiving FREE personalized market updates and research. Join other Institutional Investors receiving FREE personalized market updates and research. Join other Financial Advisors receiving FREE personalized market updates and research.

Thank you!

Check your email and confirm your subscription to complete your personalized experience.

Thank you for your submission, we hope you enjoy your experience

Bond image with dollar and clock

Bond Funds

Beginner’s Guide to Bond Mutual Funds

Mark P. Cussen Oct 15, 2014



Bond Basics


Be sure to also read the 10 Biggest Mutual Fund Investing Myths Debunked.

There are three main types of bonds:

  • Government – Backed either directly or indirectly by the U.S. Treasury. Includes T Bills, Notes and Bonds as well as TIPS and Savings Bonds. Also includes agency securities such as Fannie Mae and Sallie Mae. Treasury securities are considered to be safest securities on earth.
  • Municipal – Issued by cities or other municipalities. There are two types of municipal bonds. General Obligation bonds are backed by the taxing authority and financial strength of the issuing municipality and revenue bonds are backed by the income that will be generated from whatever project, such as a sports facility or toll road that the project that the bonds are being issued to pay for will generate in the future. Municipal bonds are second only to Treasury securities in terms of safety of principal. The interest from municipal securities is usually tax-free at the federal and state level and often at the local level as well for investors who live in the jurisdiction of the issuer, and they are typically most appropriate for investors in the highest tax brackets.
  • Corporate – Because these bonds are only backed by the financial strength of the issuing corporation, they are considered the riskiest type of bond and therefore pay the highest rates of interest. Corporate bonds that are rated BBB or below are considered “junk” bonds, and issues in this category often pay considerably more than other types of bonds-and carry a proportionately higher risk of default.


Use of Bonds in a Portfolio


Therefore, when a bond is purchased when rates are high, it will be worth more if rates decline and can often times be sold at a premium.


Types of Bond Funds


  • Government Securities Funds – These funds stick with issues that come from the U.S. Treasury. They may include agency securities such as Freddie Mac, or they may invest only in truly guaranteed offerings such as T Bonds. The American Century Government Bond Fund (CPTNX) is one such example that focuses on government issues with intermediate maturities.
  • High-Yield Funds – These funds invest in junk bonds and other more aggressive income-producing instruments such as convertible securities and junk bonds. They are designed for investors who are willing to endure greater risk and volatility in return for higher income. One example is the T. Rowe Price High Yield Fund (PRHYX).
  • Bond Index Funds – These funds purchase all of the securities that are held inside a given bond benchmark index. The F Fund in the Thrift Savings Plan for government employees mirrors the Barclay’s Capital Aggregate Bond Index, which holds treasury, corporate and foreign bonds.
  • Municipal Bond Funds – These funds purchase securities that are issued by municipalities either in a given jurisdiction or around the country. Eaton Vance offers a wide range of municipal funds, including their National Municipal Income Fund and state-specific funds such as the Missouri, Maryland and Georgia Municipal Income Funds (ETMOX), (ETDYX) and (ETGAX).
  • Corporate Bond Funds – These funds purchase investment-grade bonds from major corporations in order to generate stable income. One example is the Fidelity Corporate Bond Fund (FCBFX).
  • Global Bond Funds – These funds purchase bonds from issuers around the world as a means of diversifying income and reducing political risk. An example of this is the Kemper Global Income Fund (KGIAX).

Be sure to see the Cheapest Mutual Funds for Every Investment Objective.


Benefits of Owning Bonds Through Funds


Be sure to learn about What Happens When Mutual Funds are Redeemed or Sold.

If they can sell them in the secondary market, then they will often have to part with them at a substantial discount for which they will take a loss. But this is not the case with bond funds, which allow investors to buy and sell shares at any time regardless of the lengths or dates of the maturities held inside the fund.

Bond funds also blunt the risk of default by a given issuer because the income generated from all of the other fund holdings can offset the loss from the insolvent entity. Municipal income seekers can also save themselves time and effort by investing in municipal funds that purchase bonds solely in their jurisdiction. Tax reporting for bond fund holders is also usually simpler than for those holding individual issues because the fund will usually break down all forms of interest paid according to its tax category, such as taxable, tax-free at one or more levels and any capital gains or losses. They also usually include any amounts of OID (Original Issue Discount) and foreign tax paid.


Some Popular Bond Funds



The Bottom Line


Download Our Free Report

Why 30 trillion is invested in mutual funds book