It will probably come as a surprise to many investors that Bond funds offer as many practical options as many of the equity funds on the market. As far as bond funds are concerned, you can have core bond funds that are high quality, low risk and you can high yield bond funds that offer mid quality and medium/high risk.
For many people, bond funds offer a great alternative to term-deposits. Not only do bond funds offer liquidity as well as higher rates of returns (than comparable term deposits), but they are an asset class all their own that allows investors to tactically shore up their asset allocation model.
For a limited few, bond funds present a tremendous opportunity. Since bonds do offer growth potential, there are tax advantages to owning bonds over other income-paying investments. In its most basic format, bonds bought at a discount and held to maturity allow for capital gains rather than straight income. In some (okay, most) jurisdictions, capital gains offer benefits at taxation time. (However, if taxation is a primary concern when it comes to your investment strategy, you should consult your tax accountant to determine the best income source).
Since bond funds offer investors the opportunity to properly diversify their holdings, it has a considerable importance when it comes to your asset allocation model. The problem is that most investors have a tough time understanding the intricacies of bond funds. For example, bond prices will fluctuate based on many of the same factors that affect equity prices like currency, geopolitical, commodity as well as corporate risks.
The difference is that most bond funds will respond differently to those influences. As such, investors whose knowledge falls short on bonds need to align themselves with an advisor who does have something of a decent knowledge base when it comes to this asset class.
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