The bond market has been an incredibly competitive one lately, which will be not surprising given how people tend to gravitate towards bonds during poor economic times and/or periods of great volatility within the stock market. For several investors, the question of individual bonds vs. bond funds is one that keeps them awake at nights. Which the main bond market is the one on which an investor should focus? To assist you together with your bond market planning, below are a few things to understand about individual bonds and bond funds:
-Individual bonds provide the investor a trusted source of income (investors typically get the interest from these bonds twice per year) along with the security of knowing that the first investment (i.e. the principal) is likely to be returned when the bond matures. However, individual bonds may be sold by the investor before reaching their maturity date.
-Investors can approach bond funds as they would the stock market. Bond funds are traditionally purchased by a small grouping of individuals who pool their investment and then hand it to a broker. While individual bonds supply a twice-yearly payment, bond funds usually offer payment on a regular basis. However, that payment fluctuates significantly more than someone bond.
While many individuals have the misconception that it is simpler to diversify with bond funds, in today's interest rate and bond market environment, it is really safer for an investor to purchase a couple of individual bonds and get less diversification than putting any sum of money into an attachment fund. The bonds in funds are always changing to help keep the fund at a certain time frame so the investor hardly ever really knows what bonds their capital is invested in. By having an individual bond, the investor knows exactly what's paying the principal and interest on each of these bonds. A 10 year bond fund has to help keep the period frame so in 5 years an investor will still own a 10 year fund with various 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 be a 5 year bond that'll mature on a certain date.
With interest rates being as low as they currently are, it is very dangerous for an investor to put capital into an attachment fund because when they would like to get their cash back, they will need to sell out from the bond fund that will be at a lower price when interest rates commence to rise. By having an individual bond when rates change, the investor continues to earn the original yield he or she bought the bond at and can reinvest their principal at the existing rates when the bond matures.
-When buying an attachment fund, it is always very important to ask the broker what issuers would be the underlying securities from, what's 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 can be important for the investor to ask what fees are related to the bond fund since many funds have lots of fees that'll eat into an investor's profit. Bonds funds are known to be highly lucrative for brokers or salespeople.
An investor must also ask the broker what the SEC yield is when buying an attachment fund. Many brokers quote the existing yield of the fund which will be almost always higher compared to the SEC yield which will be the actual return on the investment. When buying individual bonds the SEC Yield or yield to worst case scenario is often quoted to the investor. premium bonds to invest
For somebody that is worried with diversification, it is just a common misconception an investor can get more diversification through a bond fund; this isn't true. When an investor buys a couple of different individual bonds, he or she is simply creating their very own 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 go into 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 actual quality of each security he or she owns.
