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Mutual funds are a type of investment that pools the funds of many investors. Investors buy shares or units in the mutual fund, which in turns hires a professional money manager to invest the money in securities. Bond funds are a type of income-producing mutual fund that invests in bonds. They are suitable for investors who want to protect their investment, but also require a steady steam of income to live. Like all mutual funds, they are also a good investment for someone who has limited investment knowledge because the professional manager makes all the investing decisions.

Bond funds produce income in the form of interest that is paid to investors on a monthly basis. Bond funds may also produce capital gains due to the trading of bonds within the portfolio. These gains are usually offset by not distributing capital losses that result from drops in bond prices.

Bond funds are considered low to moderate risk as their risk level can be minimized by diversification in a number of ways. Bond maturities can be adjusted to take advantage of different points in the economic cycle. When interest rates are low or falling, bonds with longer maturities are used; while shorter maturities are used during periods of higher or rising interest rates. Mutual fund managers also invest in different bond issuers to also help diversify risk.

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