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Bond Funds and Income Funds"Bond funds" and "income funds" are terms used to describe a type of investment company (mutual fund, closed-end fund or unit investment trust (UIT)) that invest primarily in bonds or other types of debt securities. Depending on its investment objectives and policies, a bond fund may concentrate its investments in a particular type of bond or debt security—such as government bonds, municipal bonds, corporate bonds, convertible bonds, mortgage-backed securities, zero-coupon bonds—or a mixture of types. The securities that bond funds hold will vary in terms of risk, return, duration, volatility and other features. A common misconception among some investors is that bonds and bond funds have little or no risk. Like any investment, bond funds are subject to a number of investment risks including:
A bond fund’s prospectus should disclose these and any other risks. Many bond funds invest in tax-exempt municipal bonds of a particular state. Depending upon your state of residence, the bonds of your state may be exempt from state as well as federal income tax. Not all of the income that you receive from a municipal bond fund, however, will necessarily be exempt from federal and state income tax. The fund’s prospectus will describe any of its tax-exempt features. Before investing in a bond fund, you should carefully read all of the fund’s available information, including its prospectus and most recent shareholder report. http://www.sec.gov/answers/bondfunds.htm
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