Individual bonds continue to be passed over in favor of bond funds, but for many investors, individual bonds can be a much better investment than bond funds, for five key reasons:
First, depending on the size of your investment portfolio, and your time horizon, you can save tens, if not hundreds of thousands of dollars on mutual fund fees, as investing in individual bonds can be the most cost-effective way to invest in bonds.
Second, individual bonds return your principal at a set date, bond funds don't.
Third, individual bonds pay a fixed coupon to investors. Bonds funds don't do that either. Let's face it, bond funds effectively take the 'fixed' out of fixed income.
Fourth, when you invest in an individual bond, you know the company you are investing in, and the specific bond, and investors can weigh an investment's risk and return. In many large bond funds, corporate bonds are only a portion of what they invest in. That fund can also include Treasury bonds, mortgage-backed securities, municipal bonds, credit-default swaps, stocks, you name it.
We all remember from the credit crisis how important it is to know exactly what you are investing in, and the same holds true today.
Fifth, and perhaps the biggest advantage of owning individual bonds vs. bond mutual funds: bond mutual funds have to put tens of billions of dollars to work, across hundreds, even thousands of bonds, which hurt their returns. Many investors don't need hundreds of bonds. They just need enough for their portfolios.
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