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Today’s investment world has polarizing opinions on a variety of topics, concepts and financial vehicles, and surprisingly, that can include individual bonds versus bond funds. What is the difference between the two?READ THE ARTICLE
Here’s a quick breakdown: When you buy an individual bond and hold it until maturity, you “receive regular income payments from that bond based on the yield when you bought it.” Upon maturity, you then receive your principal back in full. Amidst steep bond fund losses as of late, some investors questioned if individual fixed-income securities might have fared better; however, as Ben Carlson states, “Bond funds literally hold individual bond securities that are marked to market every day.” A fund of individual bonds is not necessarily any better or worse than an individual bond you hold. There are just differences in how these two are managed.
Pros and cons: Some of the positives of individual bonds include peace of mind when it comes to interest rate changes; plus, the ability to easily match assets with liabilities in your portfolio. However, individual bonds can also come with higher trading fees, and are in general more complex, making diversification and rebalancing difficult. On the other hand, some pros in favor of bond funds include lower minimums to invest, as well as the “ability to set a constant maturity and duration profile.” And some downsides? There is no guarantee all bonds will be held to maturity with turnover; plus, pinpointing assets to liabilities becomes difficult.
No clear-cut choice: Ultimately, deciding whether to own individual bonds or bond funds comes down to your appetite for portfolio complexity and the ability to manage individual bonds yourself. Maybe you want to own one over the other, but you are most likely to find the pros and cons will get you back to where you started. Furthermore, there could be better options worth considering beyond both.