How does one make money with a bond fund?

Question

I have looked at the "What is a bond fund?" question and this wasn't addressed.

1. Which of these are applicable (and is there anything tricky to understand about it in this case)?

   1. You can sell your shares of the fund on the market if share price rises.
   2. You receive a dividend from the fund every so often.

2. And a related question: To receive the promised "coupon", do you have to own the bond fund for a certain amount of time as with a bond, equalling the average maturity of the funds within the fund?

Answer 1

1. No. You can sell anytime. I am in pedantic mode, sorry, the way the question is worded implies that you can sell only if it rises. You are welcome to sell at a loss, too.

2. Yes.

The fund will not issue a dividend with every dividend it receives. It's more typical that they issue dividends quarterly. So the shares will increase by the amount of the undistributed dividends and on the ex-div date, drop by that amount. The remaining value goes up and down, of course, I am speaking only of the extra value created by the retained dividends.

Answer 2

Your return from a bond fund corresponds to the return on the underlying bonds (minus fees) during your holding period. So you can buy AND sell at any time. Some funds charge a penalty of 2% or whatever if you sell your fund shares within 30 or 60 days of buying it.

There are two basic ways to profit from a bond fund. 1) you get dividends from the interest paid on the bonds. 2) you have a capital gain (or loss) on the bonds themselves.

1) is likely to happen. MOST (not all) bonds pay interest on time, and on a regular basis. This component of returns is ALMOST guaranteed. 2) There are no guarantees on what the "market" will pay for bonds at any given time, so this component of bonds is NOT AT ALL guaranteed.

Your "total return is the sum of 1) and 2) (minus fees). Since 2) is uncertain, your "total return" is uncertain.