Individual Bonds vs. Bond Funds

Two of the most common investment types are bonds and bond mutual funds. However, if you are new to the investment game, or just have never looked into it that closely, you might wonder what the difference is between individual bonds and bond mutual funds. There are some similarities, but there are also some rather stark differences. Due to this, it is important for you to know what the differences are before you go about investing in one or the other.

Diversification

An individual bond is the investment in one particular company, municipality, or government. You receive a small payment in interest for the money you give the company or government. However, bond mutual funds are the combination of many different investors into one particular investment. The investment, tied together to other investors is placed into dozens, if not hundreds, of different companies, stocks, and other investment opportunities. In fact, most mutual funds have less than two percent of the total assets in one bond issuer. This way, even if one business or government goes bankrupt, it does not affect the value of the bond all that much. Some individual bonds have a large risk level for the potential of a default. Bond mutual funds, due to the diversification, do not face these same kinds of risks, simply due to the fact that the money is invested into many different institutions and companies, not simply one.

Bond Mutual Funds are Less Expensive

When you purchase a traditional bond, you are an individual investor that is usually going to be charged anywhere from 1% to 5% more for the bond than a professional investor. While this is unfair, it is usually how most purchases go. Professional businesses that buy goods from wholesale providers receive a better price, and even those in the car industry receive their vehicles for a lower price than regular car buyers. When buying a bond mutual fund, a professional with an investment company is able to obtain these bond funds for less money for you, which helps you obtain more money for your investment.

Management

With an individual bond, you are the one left in charge to manage it. While some bonds, such as government bonds, simply stay put until the maturity date is reached, there are other bonds you can sell at any time. This forces you to manage your investments, and if you are not on top of the bond, it might prove difficult to know when to sell the bonds off. With bond mutual funds, a professional manages the account so you do not have to.

Dividends

With a traditional individual bond, you receive dividends paid around once every six months. With the bond mutual funds, you receive the dividend payment either monthly or quarterly (depending on the account and your investment provider). This helps bring in a more regular income and helps with compounding your investment, which makes it easier to increase your potential return on the investment.