Bond Funds and Income Funds

Bond funds or income funds are a type of investment company ( mutual fund , exchange-traded fund (ETF), closed-end fund , or unit investment trust (UIT) . These funds invest primarily in bonds or other types of debt securities. Depending on its investment objectives and policies, a bond fund may concentrate its investments in a particular type of bond or debt security—such as government bonds , municipal bonds , corporate bonds, convertible bonds , mortgage-backed securities , zero-coupon bonds —or a mixture of types. The securities that bond funds hold will vary in terms of risk, return, duration, volatility, and other features. [1]

Before investing in a bond fund, you should carefully read the fund’s available information , including its prospectus and most recent shareholder report. [1]

Yes. A common misconception among some investors is that bonds and bond funds have little or no risk. Like any investment, bond funds are subject to a number of investment risks including credit risk, interest rate risk, and prepayment risk. A bond fund’s prospectus should disclose these and any other risks. [1]

Credit risk is the risk that the issuers of the bonds owned by a fund may default. A default means the issuer fails to pay the debt that they owe on the bonds that they have issued. This risk may be minimal for funds that invest in U.S. government bonds. By contrast, funds that invest in the bonds of issuers with poor credit ratings generally will be subject to higher risk. [1]

Interest rate risk is the risk that the market value of the bonds owned by a fund will fluctuate as interest rates go up and down. For example, when interest rates go up, the market value of bonds owned by a fund generally will go down. Nearly all bond funds are subject to this type of risk, but funds holding bonds with longer maturities are more subject to this risk than funds holding bonds with shorter maturities. Maturities are the time periods when the bonds become due for payment. Because of this type of risk, you can lose money in a bond fund, including those that invest only in insured bonds or U.S. government bonds. [1]

Prepayment risk is the risk that a bond will be paid off early. For example, if interest rates fall, a bond issuer may decide to pay off (or retire) its debt and issue new bonds that pay a lower rate.  When this happens, the fund may to be able to reinvest the proceeds in an investment with as high a return or yield. [1]

Will I receive tax advantages if I invest in a municipal bond fund? [1]

Some bond funds invest in municipal bonds that pay interest that is exempt from federal income taxes. In addition, interest on the bonds of some states is exempt from taxation by that state. Not all of the income that you receive from a municipal bond fund, however, will necessarily be exempt from federal or state income tax. The fund’s prospectus will describe any of its tax-exempt features. [1]

Ultra-short bond funds are mutual funds that generally invest in fixed income securities with extremely short maturities. Maturities are the time periods when the bonds become due for payment. Like other bond funds, ultra-short bond funds may invest in a wide range of securities, including corporate debt, government securities, mortgage-backed securities and other asset-backed securities. [1]

Some investors don’t realize there are big differences between ultra-short bond funds and other investments with relatively low risks, such as money market funds and certificates of deposit (CDs). Specifically, ultra-short bond funds tend to have higher risks than money market funds and CDs. [1]

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1. US SEC · Investor.gov — Bond Funds and Income Funds ↗

Reviewed 23 October 2026. Historical dates and award-time affiliations retain their original context. A review date is not an event date. Background sources are identified separately from official records.