What Is a Bond Mutual Fund?

Since most types of corporate and government bonds (with the exception of savings bonds) carry a price tag of $1,000 or more per bond, it can be hard for the average person to put together a truly diversified bond portfolio. 

The sheer variety of bonds available also makes it difficult to choose which ones are best for you. Should you buy a one-year bond or a 30-year bond with your $1,000? Should you buy it from the government or a corporate issuer? 

And if the bond is from a corporate issuer, which one should you choose? Many mutual funds invest in bonds. Just as bonds are less risky than stocks, bond mutual funds tend to be less risky than stock mutual funds, but pay generally lower returns. 

There are exceptions. Junk bond funds, for example, can be as risky as many stock funds. It is critical to understand one thing: Unlike an individual bond that you can hold until maturity, a pool of bonds has no maturity date. With a bond fund, there’s no guarantee that as of a given date, you will receive your investment back. If the fund managers make bad trades, you could end up losing a lot of money.