Bond Funds

A bond fund is a mutual fund or ETF that invests in government and corporate debt instruments to generate monthly income. It offers investors an alternative to buying individual bonds by providing a diversified portfolio of bonds.
Bond Funds
3 min

If you are in the market for an investment option with moderate risk and moderate returns, then look no further than bond funds. Bond Funds are unique investment vehicles that provide exposure to the extensive network of debt instruments. A bond fund is a type of mutual fund or exchange-traded fund (ETF) that invests in debt instruments, such as government and corporate bonds. Its main objective is to provide investors with regular monthly income.

In this article, we are going to explore the meaning of bond funds, the different types of funds that you can invest in and the various advantages and risks they pose.

What is a bond fund?

Also known as a debt fund, a bond fund is a type of mutual fund that invests primarily in fixed-income debt securities. These include bonds issued by companies, municipalities and governments, money market instruments and other debt securities.

The primary objective of such a fund is to provide returns in the form of fixed-interest payments regularly throughout the entire holding period. In addition to a steady stream of income by way of interest payments, you also get to enjoy the benefits of capital appreciation to a certain extent.

Since fixed-income securities are less volatile and risky compared to other market-linked investment options like equity, a bond fund offers a degree of safety to your investment capital as well.

Types of bond funds

Knowing the different types of bond mutual funds that are available in India can help you make informed investment decisions. Let us explore a few of the most common types.

  • Corporate bond fund
  • Gilt funds
  • Dynamic bond fund
  • Credit risk fund
  • Banking and PSU fund
  • Floater fund
  • Low duration fund
  • Short duration fund
  • Medium duration fund
  • Long duration fund

Advantages of bond funds

Bond funds offer a plethora of attractive benefits. Here is a quick overview of some of the key advantages you get to enjoy by investing in them.

  • Diversification
    Bond funds typically invest in a basket of different debt securities including those issued by governments, public-sector and private companies and money market instruments. Such diversification helps spread risk across different issuers, protecting you from the negative impact of adverse market movements.
  • Professional management
    Bond funds are actively managed by highly experienced professionals with decades of experience in the debt market. The fund managers actively monitor the market, make necessary adjustments to the funds’ portfolios and are constantly on the lookout for new wealth-creation opportunities while managing risk.
  • Liquidity
    Liquidity is another one of the bond fund benefits that you need to be aware of. The units of the fund can be redeemed at any point in time by selling them back to the Asset Management Company (AMC). In the case of certain funds such as bond Exchange-Traded Funds (ETFs), you can liquidate your investment by selling the units on an exchange.
  • Steady income stream
    Bond funds invest in debt securities that provide interest income periodically, which are distributed to you in proportion to your holdings at regular intervals. You could use the interest payments from the funds to supplement your main income source or reinvest them to increase your wealth creation potential.

Risks of bond funds

Despite the many benefits, bond funds also have their share of risks. As a potential investor, knowing what they are can help you make informed investment decisions. Explore the risks associated with mutual funds.

  • Interest rate risk
    Interest rate risk is the risk of the bond losing its value due to changes in the interest rates in the market. Bond prices and interest rates move inversely, meaning that when interest rates rise, bond prices fall and vice versa. Funds consisting of debt instruments with long maturity periods are more susceptible to interest rate risk.
  • Credit risk
    Credit risk is the risk of the bond issuer defaulting on the payment of either the interest, the principal or both. High-yield bond funds are particularly exposed to credit risk due to their investments in lower-rated bonds.
  • Principal risk
    The principal risk is the risk of losing the principal investment due to factors such as interest rate changes, credit quality deterioration or market conditions.


Bond funds offer a convenient way to access the debt market. The various bond fund benefits make them an attractive investment option if you are seeking capital protection and a passive income source. That said, choosing the right mutual fund schemes is crucial to ensure that you meet your financial goals.

When selecting bond funds, remember to evaluate factors such as the current Net Asset Value (NAV), bond yield and total return, among others. You could use the mutual fund compare tool available on the Bajaj Finserv Mutual Fund Platform to help you choose the right option. The platform hosts more than 1,000 different mutual fund schemes across different categories with the option for both lump sum and SIP investments.

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Frequently asked questions

What is the meaning of a bond fund and how does it work?

A bond fund is a type of mutual fund that invests in a wide range of fixed-income debt securities. Corporate bonds, government bonds, municipal bonds and money market instruments are some of the securities it commonly invests in.

A bond fund is actively managed by an experienced professional known as the fund manager. The fund manager makes all the investment decisions on behalf of investors and ensures that the fund satisfies the laid-out investment objectives.

Are bond funds a good investment option?

Yes. Bond funds could be a suitable investment option if you are seeking steady returns without taking on too much risk. That said, remember to consider factors such as your investment objectives, risk tolerance and investment horizon before investing in a bond fund.

Which is a better investment option: a bond fund or an equity fund?

Bond funds and equity funds are both attractive investment options catering to different kinds of investors. The choice between the two ultimately depends on a wide range of factors that include your preferences, risk tolerance and investment goals.

What is the difference between a bond fund and an equity fund?

A bond fund invests in a diversified portfolio of bonds and other debt instruments that are issued by corporations, governments and municipalities. An equity fund, meanwhile, invests exclusively in a diversified portfolio of equity stocks of companies. The primary objective of a bond fund is to provide steady returns while offering capital protection, whereas the objective of a stock fund is to outperform the overall market.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.