Bond and fixed income funds

Fixed income funds pool money from many investors and buy debt instruments. Bond funds are a common type, holding longer-term debt rather than very short-term paper. Their value moves with interest rates, which makes them behave differently from a money market fund.

What these funds hold

A fixed income fund buys debt instruments. These can include government bonds, corporate bonds, and other securities that pay interest. The fund earns interest from these holdings and may also gain or lose when their market price changes.

A bond fund is simply a fixed income fund that focuses on bonds. Some hold government debt, some hold company debt, and some hold a mix. Each fund states its own approach in its documents.

The holdings have different terms. Some debt matures quickly, while some runs for many years. The mix of terms shapes how sensitive the fund is to interest rate changes.

What interest rate changes do to price

Interest rates and bond prices move in opposite directions. When market interest rates rise, the price of existing bonds tends to fall. When rates fall, those prices tend to rise.

The reason is simple. An older bond pays a fixed interest amount. If new bonds pay more, buyers will pay less for the older one. If new bonds pay less, the older one becomes more attractive.

Longer-term bonds are usually more sensitive to rate changes than shorter-term ones. A fund holding longer debt can therefore swing more in price. A fund holding shorter debt usually moves less.