The bond market has been an incredibly competitive one lately, that will be no real surprise given how people often gravitate towards bonds during poor economic times and/or periods of great volatility within the stock market. For all investors, the question of individual bonds vs. bond funds is the one that keeps them awake at nights. Which the main bond market is the main one on which an investor should focus? To assist you along with your bond market planning, here are a few things to understand about individual bonds and bond funds:
-Individual bonds provide the investor a dependable source of income (investors typically receive the interest from these bonds twice per year) in addition to the security of comprehending that the initial investment (i.e. the principal) will undoubtedly be returned after the bond matures. However, individual bonds may be sold by the investor before reaching their maturity date. premium bonds to invest in the UK
-Investors can approach bond funds as they'd the stock market. Bond funds are traditionally purchased by a group of individuals who pool their investment and then hand it over to a broker. While individual bonds give a twice-yearly payment, bond funds usually offer payment on a regular basis. However, that payment fluctuates significantly more than someone bond.
While many people have the misconception that it's easier to diversify with bond funds, in today's interest rate and bond market environment, it is obviously safer for an investor to buy several individual bonds and get less diversification than putting any amount of money into a bond fund. The bonds in funds are usually changing to keep the fund at a specific time frame and so the investor never really knows what bonds their capital is invested in. By having an individual bond, the investor knows exactly what is paying the principal and interest on each of these bonds. A 10 year bond fund has to keep that time frame so in 5 years an investor will still own a 10 year fund with different underlying securities than when he or she first bought it. When an investor buys a 10 year individual bond, in 5 years that same bond will likely then be described as a 5 year bond that'll mature on a specific date.
With interest rates being only they currently are, it's very dangerous for an investor to put capital into a bond fund because when they wish to manage to get thier cash back, they will have to sell out of the bond fund which is at a much lower price when interest rates commence to rise. By having an individual bond when rates turn around, the investor continues to earn the first yield he or she bought the bond at and can reinvest their principal at the current rates when the bond matures.
-When buying a bond fund, it is obviously important to ask the broker what issuers would be the underlying securities from, what is the revenue for these securities, and what ratings do the underlying securities have. In this way the investor is fully alert to what he or she is putting his or her hard earned capital into. It is also very important to the investor to ask what fees are connected with the bond fund because so many funds have plenty of fees that'll eat into an investor's profit. Bonds funds are known if you are highly lucrative for brokers or salespeople.
An investor should also ask the broker what the SEC yield is when buying a bond fund. Many brokers quote the current yield of the fund that will be typically higher than the SEC yield that will be the real return on the investment. When buying individual bonds the SEC Yield or yield to worst case scenario is often quoted to the investor.
For somebody that is worried with diversification, it is a common misconception that an investor can have more diversification through a bond fund; this is not true. When an investor buys several different individual bonds, he or she is basically creating their particular fund. The investor can tailor their portfolio or 'created fund' to his or her specific investment goals by picking and choosing the precise bonds that enter the portfolio. Not only can the investor get excellent diversification and have a portfolio fitting their specific needs, but he or she'll know the real quality of each security he or she owns.
