Skip to Content
Commentary

Bonds Vs. Bond Funds

This series of articles will tackle the basics of bond investing.

Editor's note: This article is part of our "How and Why to Invest in Bonds" series. Click here to read other articles.

Some brokerage firms like to tell clients they should buy bonds instead of bond funds, but for many investors, that is rarely a good idea. There are several possible advantages to investing in a mutual fund's portfolio of bonds rather than buying bonds directly.

The primary reason is the ease of diversification.

Bonds are typically issued with face values of $1,000, but you may need to buy a block of several bonds to obtain decent pricing. To assemble an individual-bond portfolio that's reasonably diversified across market sectors, $100,000 is often cited as the minimum threshold at which a portfolio of individual bonds could make sense over a bond fund. By contrast, bond-fund investors assemble a very broadly diversified portfolio of bonds for a low cost--corporate bonds, government bonds, and bonds backed by assets like mortgages--thereby aiming to reduce the damage that any one holding can inflict on their overall portfolios.

In a related vein, individual-bond buyers, particularly those without a lot of money to invest, can face high trading costs when transacting in individual bonds, which can make a real dent in returns.

Morningstar Research Services' senior analyst Eric Jacobson says that U.S. Treasury bonds are an important exception. The U.S. Treasury market is extremely large and liquid, its structures are as simple as they come, and most brokerages charge modest fees to buy and sell them at very fair prices. For pretty much everything else, the cards are stacked against you.

Professional management is also a key virtue of mutual funds, and this is arguably even more important in the realm of bonds than in stocks. That is because, in addition to evaluating bonds' interest-rate sensitivities, bond-fund managers also spend time evaluating bond issuers' creditworthiness as well as other features of the issuers and their bonds.

Part 4: To Index Bonds or Not?

The following authors contributed to this series:

Tom Lauricella, Editorial Director, Professional Audiences
Christine Benz, Director of Personal Finance
Sarah Bush, Director, Fixed-Income Strategies
Jeff Westergaard, Director, Fixed-Income Data

Click here for important information about this commentary.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.