How Individual Bonds and Bond Funds Compare - dummies

How Individual Bonds and Bond Funds Compare

Bond investing requires you to decide whether you want to invest in individual bonds or bond funds. Here are some of the pros and cons of owning individual bonds versus bond funds.

Considering individual bonds as your investment

Individual bonds offer investors the opportunity to really fine-tune a fixed-income portfolio. With individual bonds, you can choose exactly what you want in terms of bond quality, maturity, and taxability.

For larger investors — especially those doing their homework — investing in individual bonds may also be more economical than investing in a bond fund. That’s especially true for those investors who are up on the latest advances in bond buying and selling.

Choosing a bond fund or funds for investing

Bond funds — both bond mutual funds and exchange-traded funds — are probably the better choice between individual bonds and bind funds for many investors. They both represent baskets of securities (usually stocks or bonds, or both) and allow for instant and easy portfolio diversification.

Investors now have a choice of more than 5,000 bond mutual funds or exchange-traded funds. All have the same basic drawback: management expenses. But even so, some make for very good potential investments, particularly for people with modest portfolios.

As you’ll discover, it is a good idea to buy index funds — mutual funds or exchange-traded funds that seek to provide exposure to an entire asset class (such as bonds or stocks) with very little trading and very low expenses. Such funds are the way to go for most investors to get the bond exposure they need.