Bond Fund In dealing with bond fund or an income fund, the descriptions are identified as terms that describe company investments that primarily deal in bonds or various forms of debt securities. Relying upon the investment objective, the bond fund can focus the investment in a fashion of bond type or security like government, municipal, corporate, convertible, mortgage-backed securities, zero-coupon bonds or any combination of types. Securities that a bond fund may hold can fluctuate in regards to investment risk, rate of return, length of term, stability, and other dynamic features. The typical misunderstanding with novice investors is that a bond or a bond fund carries no risk. However, this is not true. A bond fund is similar to any type of investment. Some of the risks with the investment are: Credit risk -There are associated risks with the issuers of the bonds that are owned to a fund in that you may default (failure to make payment on the debt that is owed on the bond). There is a minimal risk associated with funds that are either government issued or are insured. Prepayment risk -This refers to the risk that an issuer of a bond, owned by a fund will incur when making a prepayment at a time when interest rates have declined. Since the interest rates have since gone down, the fund may be required to make a reinvestment of the proceeds to the bond, which carries a lowered interest rate. This in turn would reduce the return for the fund. Interest rate risk -This refers to risks towards the market valuation of a bond that is possessed by a fund that fluctuates as the interest rates shift. Practically all forms of bond fund is subject to this form of risks. However, a fund that is holding a bond or bonds that have a longer maturity term, hold a higher risk than a fund that holds bonds with a shorter maturity term. Due to risks of this type, money can be lost on a bond fund. This includes investors that only participate in the investing of insured or government bonds. The prospectus of the bond fund needs to disclose any and all risks.