Bond funds invest in corporate bonds and government securities. Bond funds are long-term and short-term in nature. Typically, long-term bond funds carry an average maturity of three, five or even 10 years. Bond funds invest in securities that mature around that period on average. In bond funds the risk is more if the average maturity is higher.In a falling interest rate regime, long-term bond funds gives you higher returns. Long-term bonds funds are, typically, seasonal.The short-term bond funds usually carry a maturity of around one to three years and are meant for the investor who wishes to invest for a time horizon of about three months to one year.
You have both growth and dividend options in bond funds. In dividend option you have dividend payout and dividend reinvestment option. Dividends are Tax free but mutual funds have to pay the dividend distribution tax before paying the dividends to the investors.