Simple enough… A bond fund is a fund that’s made up of bonds, as opposed to stocks or other investments.
Bonds represent a loan made at a certain rate for a particular length of time. They pay dividends. Stocks represent ownership shares in the company. That’s the difference between stocks and bonds.
Bond funds behave differently than individual bonds. When you invest in a bond fund, it will be managed. Bond fund managers buy and sell bonds all the time. So, you will have ever changing yields, profits, and losses.
Why invest in bond funds? It’s easier and more convenient to invest in a bond fund rather than individual bonds. Having your investment spread over many bonds helps reduce your risk. You will also avoid transaction fees incurred through trading individual bonds.
It’s important to remember from a risk standpoint, that with bonds and bond funds, the higher the return, the higher the risk.
If you cannot afford the risk, stay away from international bond funds as a rule. Riskier still are high yield bond funds.