Which is Better – Individual Bonds or a Bond Fund?
Which type of bond is better? The answer to this question will depend on what you are looking for in your investment.
Preservation of Principal
If preserving principal is high on your list of goals, individual bonds are generally the better choice because the bonds’ face value is returned to you in full at maturity, unless the bonds default. With a bond fund, the find’s share price will fluctuate and the amount you receive when you sell your shares may be higher or lower than the amount you paid for them.
Individual bonds typically pay a fixed rate of interest every six months so you know right up front how much income to expect each period. The income payments from bond funds, which continually buy and sell bonds, will fluctuate in value from one month to the next.
Ease of Diversification
If building a diversified bond portfolio with a relatively modest investment of time and money is important to you, then a bond fund is generally the way to go. Bond funds typically hold bonds from several bond issuers – sometimes hundreds of issuers – providing a degree of diversification that can be time-consuming and require a significant investment to achieve on your own with individual bonds.
If liquidity is a priority, bond funds are typically a better choice. Bond fund shares can generally be sold at any time at their current net asset value (NAV). In contrast, some individual bonds may lack liquidity.
NOTE: Bonds are subject to interest rate risk. When interest rates rise, bond prices usually fall. The effect is usually more pronounced for longer-term securities. Fixed-income securities also carry inflation risk and credit and default risks for both issuers and counterparties. You may have a gain or loss if you sell a bond prior to its maturity date.
Before investing in mutual funds or ETFs, investors should consider a fund’s investment objectives, risks, charges, and expenses.
There is a lot to consider when considering bonds. At Copper Leaf Financial, we work with you over the long term. We develop a plan that acts as a road map - and evolves over time. It reflects changes in your life and your goals. We can alleviate that sinking and overwhelming feeling that keeps you up at night trying to decide where and how to invest for your future. A proper plan enables you to invest the same way we do: broad diversification, low costs and appropriate levels of risk. We prize evidence over emotion and we value academic and market research over fluctuating opinions. With offices in Rutland and Williston Vermont, you can contact our office at 802.878.2731 for more information.
Article published in March edition of Eye on Money magazine.