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Fund Spy

New Bond Funds Act Like Bonds Only Better

Fidelity and PIMCO get innovative with TIPS and muni funds.

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In most ways owning bond funds is superior to owning bonds directly. You get greater diversification so that one issue going bad or maturing at the market bottom doesn't hurt you. You also get better prices--if you think your $20,000 purchase is getting the same treatment as a $10 million purchase from a mutual fund giant, you're deluded. In fact, it's extremely difficult to know if you're getting a good price. And funds offer crucial research--that typically determines what the right price should be--on things like call features, credit quality, and payment structures that you can't get on your own.

However, bonds have a couple of advantages over bond funds. They give you greater predictability about how much you'll have to spend at a certain date. Admittedly, you don't know what inflation will be, so you still won't know how far those dollars will go.

In addition, you can more closely tailor a bond portfolio to your money needs by lining up a ladder of maturity dates. (However, you still face the challenge of losing income as you have to reinvest interest income in small sums or wait until you've accumulated enough to reinvest.)

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.