Bonds and Bond Funds are not the same.
I'll start with bonds.
A bond is a debt, much like a mortgage. If you buy a bond, you are buying a debt, just like a bank buys a debt when it issues a mortgage. The bond comes with terms. The terms include how long before the money has to be repaid in full and how much interest it will pay in the meantime. Assuming the bond issuer does not go bankrupt, your money is in a safe place with a known return on investment.
Example: You buy a bond for $10,000. It pays 4% over 10 years. Every year you would receive $400 in interest and at the end of ten years, you would have your $10,000 back. At that time, you could buy another bond at whatever the prevailing interest rate is.
What if you need some money back before 10 years go by? One way would be to set up a bond ladder. Buy bonds at different term lengths at staggered intervals. This could be called a bond ladder. That way, after it's set up, every few months a bond would be maturing and you would have cash available. If you didn't need the cash at that time, you would buy another bond.
That's why bonds, PURCHASED IN THIS MANNER, would tend to mitigate the volatility of the stock market.
I hope that makes sense.
But what happens if you need money from a particular bond, RIGHT NOW, even though it has not matured?
Well, let's go back to that 4% interest rate bond. If I wanted to sell you a "used" bond that paid 4% interest, but you could buy a "new" bond that paid 6%, you probably wouldn't be interested in my bond. Conversely, if new bonds only paid 2%, my 4% bond would be much more interesting, right? So, when I sell a bond early, I'm going to sell it for more or less than I paid for it depending on the current bond rate compared to the bond's interest rate. I would have to sell my used bond at a discount if new interest rates were higher than my bond and I could sell at a surplus if new rates are lower.
Now, the best way to avoid the problem of having to sell a bond at a discount is not to need the money before the bond matures. :) That's what a stache is for! :)
Now, let's talk about bond funds. What's a bond fund? It's like a mutual fund of stocks, except it's composed of bonds instead of stocks.
Why invest in a bond fund instead of individual bonds?
Individual bonds don't come in small dollar increments. The dollar values are much higher, so it's harder for someone starting out to buy an individual bond in full. It's the same reason why mutual funds of stocks allow you to own partial shares of stocks.
Second, how many high dollar value bonds can you afford to buy? If you are like most folks, not that many. That means your bond savings are more subject to bankruptcy risk, just like buying a portfolio of just 10 stocks is riskier than buying an index of thousands of stocks.
The above reasons show bond funds are a good deal for those who can't safely (or at all) afford to invest in individual bonds.
The problem is that you're bond holdings are mixed up with other people. If they haven't managed their affairs well, they will need to sell some bonds. If a lot of them have to do that, the bonds that are maturing in the fund will not be enough to cover the fund's need for cash to hand back to fund holders. So bonds will have to be sold before they mature. If current interest rates are lower than the bonds they sell, the bonds will be sold at a discount. Since you own some of those bonds, you'll take a loss on those bonds even if you didn't sell any out of your account.
That's why bond funds follow the stock market more than individual bonds do.
I hope that helps out. It took a long time before I understood this, a lot of the explanations I were just a mishmash of partial information.