Individual Bonds vs. Bond Funds

If you are planning to invest your money for the future there is a lot of information that will teach you about various opportunities. Understanding these opportunities is the only way to choose the best investment type for your specific needs. Take mutual funds for instance. They can be very beneficial and you can purchase funds in a number of different industries. Bond funds give you smaller pieces of different bonds from various different issuers and each of the bonds will have a different maturity. Bond funds can be purchased on everything from Treasuries to corporations and have many advantages. Individual bonds have a few advantages as well and many prefer individual bonds over bond funds for a number of different reasons.

You should understand that the prices of bond funds will likely rise and fall while individual bonds have a more specific maturity, meaning that you will know how much they will be worth once they reach maturity. The price of both bond funds and individual bonds will change as interest rates change. When interest rates fall then the price of bond funds and individual bonds will rise. Alternatively when the interest rates rise then the price of the funds will fall. You should also understand that the longer period of time until a bond matures, the greater the impact that interest rates will have on that specific bonds price.

When determining which is best for you between bond funds and individual bonds you should understand that individual bonds give you the opportunity to hold onto them even after interest rates have risen. You may receive a smaller interest payment than someone who is purchasing a new bond but you will always receive the specific face value of that individual bond once it reaches maturity. This is not true of bond funds. Bond funds have no specific maturity date because they are continually bought and sold. You may find that you are actually losing money once you sell bond funds. However, bond funds do offer a higher amount of interest which can help to increase your payments over longer periods of time. Those who may be concerned about the fluctuation in price with bond funds may feel much more comfortable purchasing individual bonds. In order to receive the benefit of guaranteed payment upon maturity however, you will need to hold your individual bonds until they mature. If you decide to sell them before their maturity date then you will experience the same loss that you would experience if you purchased bond funds instead.

Many choose to purchase United States Savings Bonds simply because they are a safer investment than many other options. Savings bonds however do not always keep up with the rising cost of inflation. If you purchase corporate or municipal bonds then you may want to invest in various different bonds to help protect yourself against the various risks. This may require a fairly large amount of money and those just beginning in investments may find it a bit overwhelming. Keep in mind that in order for individual bonds to pay off you have to hold them until maturity. Bond funds allow you the opportunity to reinvest your dividends and make smaller investments if you want. You can withdraw a portion of the money that you have invested if you need to sell your bonds before they reach maturity. Bond funds are flexible with regards to selling and buying, but if you want to ensure that you get back all of your capital investment then individual bonds are a much safer choice. The ultimate decision on which is best will depend on your own personal preferences and how safe you feel taking risks. It is recommended that you research a bit on your own and learn more about individual bonds vs. bond funds before you make your ultimate decision or you can simply invest in both fund types.

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