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Bond funds including mutual funds (open-end and
closed-end, actively managed and indexed), exchange-traded funds and unit
investment trusts offer a convenient and affordable way to invest in a
diversified portfolio of bonds, but a bond fund investment can differ from a
bond investment in ways that are important to understand.
When you buy a bond fund, you buy shares in a portfolio of bonds that is
created or managed to pursue a specific investment objective such as current
income, current tax-exempt income, total return, or to match the performance
of a market index. The portfolio might invest in a particular type of bond
(government, municipal, mortgage or high-yield) or a particular maturity
range (short-term: three years or less; intermediate term: three to 10
years; or long-term: usually 10 years or longer).
Many bond funds make monthly or quarterly ?dividend? payments, as opposed to
the semiannual payment schedule common to most bonds. Their price is based
on their Net Asset Value (NAV), or the total market value of the portfolio
divided by the total number of fund shares outstanding. A fund?s NAV changes
daily with market conditions and in some cases with cash inflows and
outflows to and from the fund portfolio.
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